India Stocks Trail Global Surge: AI Lag, Trump Fears Drive FPI Outflows

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AuthorAnanya Iyer|Published at:
India Stocks Trail Global Surge: AI Lag, Trump Fears Drive FPI Outflows
Overview

Despite robust economic growth and falling inflation, Indian stock markets are underperforming global peers. Key factors such as low direct exposure to the AI boom, significant foreign investor (FPI) outflows linked to geopolitical uncertainty and Donald Trump's potential return, and valuation concerns are weighing on sentiment. While domestic investors provide support, sustained market gains hinge on FPI re-entry and clearer geopolitical and trade outlooks.

Global AI Boom Diverts Capital

The divergence is starkly illustrated by the artificial intelligence (AI) surge. South Korea's Kospi has capitalized significantly, riding the wave through tech giants like Samsung Electronics and chipmaker SK Hynix. Nomura highlights South Korea's high exposure to AI's memory ecosystem, projecting substantial gains from rising DRAM and NAND prices, a stark contrast to India's 'low' AI exposure classification.

Meanwhile, Japan's markets have also climbed, buoyed by a weaker yen which boosts exporter earnings and Prime Minister Sanae Takiachi’s potential fiscal stimulus plans, attracting speculative 'Takiachi trade' investments. In contrast, Indian indices have tread water, even declining slightly over the past month, despite positive economic indicators like 7.4% GDP growth forecasts and supportive tax cuts.

Geopolitical Clouds and FPI Woes

A major headwind for Indian equities is the persistent withdrawal of foreign capital. Foreign Portfolio Investors (FPIs) have already net sold shares worth $2.5 billion in the first 16 days of 2026, following nearly $19 billion in outflows during 2025. This trend accelerated as uncertainty surrounding Donald Trump's return to the White House and accompanying policy ambiguity grew. Experts suggest FPIs will remain cautious until global geopolitical conditions stabilize and a US-India trade deal, long in negotiation, materializes. This deal's progress has been hampered by geopolitical events and lack of positive trade talk developments.

Valuation Concerns Linger

Compounding the issue, Indian equities are perceived as relatively expensive compared to regional peers. While historically commanding a premium, this valuation is currently not supported by sufficient earnings comfort, leading to inconsistent foreign institutional investor (FII) flows. Although domestic institutional investors (DIIs) and robust retail participation have provided a floor, driving the market to record highs earlier, sentiment requires broader investor participation to push higher. Investors are keenly awaiting actual earnings figures in the latter half of FY26, despite the market's strong five-year track record of over 70% returns, which surpasses many global benchmarks.

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