India has lost roughly $924bn of market value since its record $5.73tn peak in September 2024. Its weight in the MSCI Emerging Markets index has plunged to about 12% from 19% a year earlier, and foreign ownership of Indian equities has fallen to a 14-year low, with domestic institutions now holding a larger share than foreigners for the first time in more than 20 years, Goldman Sachs calculations cited by Bloomberg show. Fund managers and strategists say the retreat reflects a global rotation into AI-linked stocks, a move that penalises markets such as India which lack deep exposure to chipmakers, hyperscalers and data-centre builders. That rotation has already driven about $42bn of net foreign outflows since the end of 2024, and left liquidity thin in benchmark large caps.

The read here is straightforward. A market that was a decade-long favourite has been repriced because it missed the AI trade. That repricing is large. India’s market value has fallen from a $5.73 trillion peak in September 2024 to a loss of roughly $924 billion, and India’s share of the MSCI Emerging Markets index has dropped to about 12% from 19% a year earlier.

Why investors rotated out

Three linked forces explain the shift. First, active and passive flows aligned around thematic AI exposure have reshaped index maths. M&G Investments estimates that roughly two-thirds of the reallocation out of India over the past 12-18 months reflects AI positioning. Kotak Securities, in its "With or Without AI" strategy report, points to thematic demand changing the market-cap calculus across emerging markets.

Second, performance differentials have been stark. AI-driven equity benchmarks in South Korea and Taiwan were reported up about 78% and 42% respectively this year, while India’s main gauge is down more than 9% and is on course for its first annual decline after a decade of gains. Kotak contrasted those returns with the Bloomberg AI Index, which Kotak said stood near $25 trillion in market capitalisation versus roughly $3 trillion for India’s contribution to that AI-driven segment.

Third, listed India’s composition gives limited direct exposure to the AI supply chain. Kotak’s analysis showed the top 25 Indian companies remain dominated by Reliance Industries, HDFC Bank, TCS, ICICI Bank, SBI and Bharti Airtel. Traditional sectors supplied most market-cap growth, rather than technology innovators tied to chipmaking or hyperscale cloud.

Who is hurt and how

Foreign portfolio outflows have drained liquidity from the large caps that matter most to retirement funds and retail investors. Kotak noted that benchmark-heavy names have borne the brunt of the exits.

Managers said the wave of exits began accelerating at the end of 2024 as oil prices surged, raising inflationary pressure and weakening the rupee, which compounded losses for consumers and corporate importers of energy.

Mastheads

The capital-flow numbers are plain. After peaking in September 2024, India has seen $924 billion of market value evaporate, and foreign investors have withdrawn a net $42 billion since the end of 2024, according to reporting that cited Goldman Sachs and Bloomberg. The combined effect is a market that's smaller in index weight, more domestically owned than at any point in two decades, and out of sync with the principal growth theme driving recent global equity rallies.

Fund managers have framed the decline as more than a routine earnings shock. "This isn’t a dip you buy," Gary Dugan, chief executive of Global CIO Office, said in the coverage. He argued markets need to reset long-term or "terminal value" assumptions about where businesses will be in 10 years. Aadil Ebrahim, group head of equity research at Klay Group, warned that headline indices remain anchored to the past while global capital reallocates toward AI-enabled markets.

Bloomberg-linked reporting and Kotak cited the Bloomberg AI Index as a measurement of the shift. By Kotak’s figures, the Bloomberg AI Index rose about 48% over 12 months and about 67% over six months, underscoring the momentum behind AI trades and the size of the benchmark set investors are chasing.

That momentum forced a technical reweighting across emerging-market allocations. As managers chased AI exposure elsewhere, India’s role in emerging-market portfolios shrank materially. M&G’s estimate and the figures cited by Kotak sketch how thematic demand has altered which markets capture the bulk of new capital.

For households and corporates the consequences are practical. Reduced foreign liquidity has made it harder to trade large-cap names without price impact.

Higher oil costs have increased inflation, hurt the rupee, and raised input costs for firms that import energy. The result is a domestic market less shielded from macro shocks and more sensitive to local funding conditions.

The shift also has political economy implications for corporate strategy. If markets now reward AI-linked revenue streams, India’s corporate champions may face renewed pressure to pivot investment and acquisitions toward software, cloud and semiconductors. Kotak’s report argues that, absent that pivot, headline indices will stay anchored to traditional sectors and therefore to lower relative investor demand.

There is one more technical point. The Bloomberg AI Index’s market capitalisation stood near $25 trillion, compared with roughly $3 trillion for India’s contribution to that AI-driven segment, a gap that helps explain the speed and scale of reallocations as index and passive flows followed performance.

Related Articles

Watch the next MSCI Emerging Markets index review, forthcoming quarterly results from India’s largest companies, and any change in Reserve Bank of India guidance for clues whether foreign capital returns or the rerating persists.

This article was created with AI assistance.