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    BUSINESS & TRADE                                                          MAY 15, 2026     |  The Indian Eye 36

                   India’s New Economic Challenge:

                      Capital Flight and the AI Divide

            Foreign investors are pulling billions from Indian markets as the global AI boom reshapes

                    capital flows, exposing structural vulnerabilities in Asia’s third-largest economy

            OUR BUREAU
            New Delhi / Mumbai
               ndia’s  economy  is  confronting  a  difficult  new
               reality. The challenge is no longer simply about
            Iinflation, oil prices or fiscal deficits. Instead, the
            country now faces twin pressures that could shape
            its economic trajectory for years: sustained foreign
            capital  outflows  and  the  disruptive  impact  of  the
            global artificial intelligence boom.
                The irony is striking. India remains one of the
            world’s  fastest-growing  major  economies,  domes-
            tic investors continue to pour money into equities,
            and corporate India still benefits from strong long-
            term consumption trends. Yet global investors are
            increasingly looking elsewhere.
                According to a Goldman Sachs strategy report
            titled Outflows Fade, But Re-entry Waits, foreign
            institutional investors (FIIs) have already sold USD
            22 billion worth of Indian equities in 2026, surpass-
            ing the previous annual sell-off record of USD 19            The global AI boom has fundamentally altered investor behaviour (ANI File Photo)
            billion set in 2025. Since the market peak in Sep-
            tember 2024, cumulative foreign selling has reached
            a staggering USD 53 billion.                  per cent in dollar terms.                       Yet  the  situation  is  more  complicated  than
                The  result  has  been  historic.  “Foreign  owner-  “The  divergence  is  structural,”  the  brokerage   headline numbers suggest.
            ship in equities dropped to a 14-year low in 1Q CY26,  observed. “India’s lower exposure to AI hardware   Motilal Oswal argued that India’s broader mar-
            and slipped below domestic institutions for the first   and the narrow, concentrated nature of the global   ket remains relatively resilient once the IT sector
            time in over two decades,” Goldman Sachs noted.  AI rally have limited participation.”     is excluded. Domestic investors, especially mutual
                That shift marks a structural turning point in   This exposes a major weakness in India’s eco-  funds and pension flows, have emerged as a power-
            Indian markets. For decades, foreign capital served   nomic story. For years, the country positioned itself   ful stabilising force.
            as a major driver of India’s stock market expansion   as a technology powerhouse through software ser-  Domestic institutional investors invested USD
            and  global  financial  integration.  Today,  domestic   vices and digital innovation. But the AI revolution   5.4 billion in a single month, marking the twelfth
            institutional investors are increasingly carrying the   is  currently  rewarding  countries  dominating  semi-  consecutive month of inflows above USD 5 billion.
            burden of sustaining market stability.        conductor fabrication, memory chips and advanced   Systematic  Investment  Plans  (SIPs)  continue  at-
                The reasons behind the exodus are not difficult   hardware manufacturing — areas where India re-  tracting  steady  retail  participation,  while  pension
            to identify. Indian equities continue to trade at premi-  mains relatively weak.           funds are adding significant equity exposure.
            um valuations compared to many Asian peers, while   Jefferies described the trend as a “reverse AI   There is, however, a possible opening.
            earnings visibility has weakened amid slowing glob-  trade,” which has reduced India’s weighting in the   Motilal Oswal suggested that the AI trade may
            al demand and geopolitical uncertainty. Goldman   MSCI Emerging Markets Index from 19.5 per cent   eventually become overstretched. “With AI trade
            Sachs bluntly stated that India currently offers a “less   to around 11.5 per cent since early last year. Mean-  having  run  for  an  extended  period,  any  potential
            attractive  risk/reward”  than  North  Asian  markets.  while,  Korea  and  Taiwan  have  gained  weight  be-  unwinding or rotation could redirect FII flows to-
                But the deeper issue lies in artificial intelligence.  cause investors increasingly see them as central to   ward structurally strong domestic growth markets
                The global AI boom has fundamentally altered   the AI supply chain.                    like India,” the report stated.
            investor behaviour. Markets with strong exposure   The numbers explain why. Jefferies noted that   The danger for India is not immediate collapse.
            to semiconductor manufacturing, AI hardware and   Samsung and SK Hynix alone are forecast to gen-  The economy remains large, dynamic and domesti-
            advanced technology infrastructure — particularly   erate profits of USD 307 billion this year — three   cally resilient. The greater risk is slower irrelevance
            South Korea, Taiwan and the United States — have   times the combined forecast profits of India’s Nifty   in a world where global capital increasingly rewards
            become magnets for global capital.            50 companies.                                countries positioned at the centre of the AI revolution.
                According to Motilal Oswal Financial Services,   In many ways, India is becoming a victim of glob-  For now, India stands caught between two pow-
            India’s underperformance against major global mar-  al capital concentration. Investors chasing AI-driv-  erful  forces:  foreign  money  leaving  and  artificial
            kets since 2024 has been “largely driven by global AI   en growth are crowding into a handful of markets   intelligence  reshaping  the  global  investment  map.
            trade.” South Korea has risen 53 per cent in USD   closely tied to semiconductors and advanced com-  How the country responds may determine whether
            terms in 2026 so far, Taiwan 33 per cent and Brazil   puting  infrastructure.  India,  despite  its  strong  do-  it remains a rising economic power — or becomes a
            28 per cent. India’s Nifty, by contrast, declined 13   mestic economy, simply lacks equivalent exposure.  spectator in the next technological era.

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