India missed out on AI and now its run as 'market darling' may be over

India’s stock market is on the brink of dropping out of the world’s five largest for the first time in three years, as artificial intelligence reshapes global investment flows. The country’s market, which peaked at $5.73 trillion in September 2024, has lost $924 billion in value since, with foreign investors withdrawing a net $42 billion since the end of 2024. This shift reflects a broader rotation toward AI-focused markets like Taiwan and South Korea, where equity benchmarks have surged 78% and 42% this year, respectively, while India’s gauge is down over 9%. The decline stems from India’s limited exposure to AI-driven sectors such as chip manufacturing, computing infrastructure, and AI models. While the country boasts talent, demand, and digital scale, few of its corporate leaders are directly tied to these growth areas, leaving its market reliant on domestic consumption. Global investors, who once viewed India as a rival to China in emerging markets, are now prioritizing AI-related opportunities, according to M&G Investments and Goldman Sachs. India’s weight in the MSCI emerging markets index has fallen from 19% last year to about 12%, with two-thirds of the reallocation linked to AI positioning. Foreign ownership in Indian equities has hit a 14-year low, with domestic institutions now holding more than international investors for the first time in over two decades. Analysts warn this isn’t just a temporary dip but a structural underweight, as India’s stock indices remain anchored to past trends rather than AI-driven innovation. The rupee has weakened to a record low against the dollar, further pressuring the market amid rising oil prices and inflation risks. India’s Nifty 50 Index, once the world’s best-performing major market, is now heading for its first annual drop in a decade. Without a shift toward AI and tech innovation, the country risks falling further behind competitors like Taiwan and South Korea, which are within $500 billion of surpassing India in market value. Experts argue India’s long-term growth assumptions must evolve to reflect a new generation of innovators. Until then, the market’s reliance on domestic consumption and lack of AI integration will continue to deter global capital, deepening its underperformance in the AI-driven investment cycle.