Bay Capital expects foreign investors to return to India as the global focus shifts from AI-linked markets like Taiwan and South Korea toward fundamental economic growth. Despite significant foreign selling, strong domestic inflows have provided a cushion, setting the stage for a potential turnaround by FY2027.
India’s equity market may be nearing a shift in foreign capital sentiment as global interest in artificial intelligence investments begins to normalize. According to a recent analysis by Bay Capital Investment Advisors, the significant reallocation of foreign portfolio investor (FPI) capital toward AI-focused markets—specifically Taiwan, South Korea, and China—is expected to wane, potentially redirecting liquidity back to India by the next fiscal year.
The capital rotation away from India has been notable over the past two years. Between 2024 and November 2025, FPIs pulled approximately $36 billion out of Indian equities. During this same timeframe, capital flowed heavily into markets with direct exposure to the semiconductor and AI supply chains. Taiwan alone recorded $34 billion in inflows, while South Korea and China saw combined inflows of $40 billion. India’s position as the only major emerging market to face net outflows during this period was largely due to its lack of representation in global AI-specific stock indices.
Risks in the Current AI Infrastructure Trade
Beyond the capital rotation, Bay Capital has raised concerns about the sustainability of the current AI-led market rally. Projections indicate that global hyperscaler capital spending on infrastructure is expected to hit $220 billion in 2025, a steep increase from $100 billion in 2021. However, the report highlights a growing gap between infrastructure spending and actual business results. Citing an August 2025 study from MIT, the firm noted that 95% of organizations are currently failing to generate a measurable return on their generative AI investments. This disconnect, combined with the fact that much of this infrastructure spending is currently funded through debt, has led to comparisons with the early 2000s dot-com era.
Domestic Strength as a Structural Buffer
While FPI outflows have historically caused significant volatility in emerging markets, India has shown a unique resilience. The market has been effectively supported by robust domestic liquidity, with mutual fund assets under management growing 27% year-on-year to reach ₹65 lakh crore. Additionally, monthly inflows through Systematic Investment Plans (SIPs) have stabilized at around ₹21,000 crore.
This domestic demand has acted as a critical shock absorber, preventing a deeper correction during periods of heavy foreign selling. With India’s GDP growth projected at 6.7% annually through FY2028 and a stable inflation environment, analysts suggest that once global investors prioritize fundamental economic growth over speculative technology themes, India is likely to regain its appeal.
For investors, the key monitorable will be the transition point where global liquidity starts to favor broader market fundamentals. Observing shifts in FPI activity alongside continued domestic inflow trends will be important to confirm if the expected pivot in fiscal year 2027 gains momentum.