Taiwan and South Korea’s stock markets have surged past India within a week, driven by global investor demand for AI plays like TSMC, Samsung, and SK Hynix. India, lacking major AI stocks, faces weakening domestic consumption, higher inflation, and a depreciating rupee, prompting foreign investors to sell $27.6 billion in equities since January. Experts highlight India’s high valuations and moderate earnings growth as key deterrents, suggesting a prolonged period of reduced foreign investor enthusiasm.
Hello from Singapore! This is Priyanka Salve, bringing you the latest from "Inside India," your definitive source for developments from the world's fastest-growing large economy. This week, we dive into how the global obsession with AI is overshadowing India's domestic consumption narrative, leading to a dramatic shift in Asia's market rankings.
The Big Shift: AI's Trillion-Dollar Influence
In 2026, the 'animal spirits' of investment are vigorously pursuing artificial intelligence firms, catapulting the valuations of giants like TSMC, Samsung, and SK Hynix to over a trillion dollars. This surge, fueled by AI-driven gains, has been a boon for Taiwan and South Korea, enabling their stock markets to rapidly overtake India's.
For India, a nation without a significant large-scale AI player, this trend poses a considerable challenge. This is particularly acute at a time when its previously robust domestic consumption story is showing cracks. Indian households are grappling with higher inflation, a weakening currency, and a deceleration in the creation of quality jobs. These factors, compounded by an increase in input costs due to the conflict in the Middle East, are expected to temper corporate earnings for the financial year ending March 2027, making foreign investors increasingly eager to divest.
Since January, foreign investors have offloaded Indian equities totaling $27.6 billion, a stark contrast to the $18.9 billion sold in all of 2025, according to data from India's NSDL depository.
Meanwhile, the market capitalization of India's regional peers is soaring. Taiwan's market cap surged to nearly $5 trillion, surpassing India on May 26 to become the world's fifth-largest equity market. Within a mere week, South Korea followed suit, dislodging India from its sixth-place position, based on data compiled from the three exchanges. The tables, it seems, have sharply turned against India.
Just 18 months ago, India's equity market cap was 3.5 times that of South Korea and more than double Taiwan's, noted Bernstein analysts in a recent report. Nitin Jain, CEO and director of Kotak Mahindra Asset Management Singapore, observed that for nearly a decade until 2024, India was among the top-performing markets. Now, he tells CNBC, the narrative has shifted from India being "the best story to a story which nobody wants to even think about."
AI Dominance vs. India's Consumption Narrative
AI is a "very powerful theme," and as long as companies in this sector continue to see earnings upgrades, investors are unlikely to shift their capital to other markets, Jain explained. Year-to-date, Korea's Kospi 200 has surged over 130%, while Taiwan's FTSE TWSE 50 is up more than 60%, significantly outperforming all other Asian peers. In stark contrast, Indian benchmark indices are in the red, having fallen over 10%, according to LSEG data.
Venugopal Garre, managing director and head of India research at Bernstein, told CNBC's Inside India that India has regrettably missed the AI boat. India lacks a robust ecosystem for semiconductor manufacturing, and its IT service companies have primarily focused on labor arbitrage rather than venturing into riskier, capital-intensive new areas like cutting-edge AI development. However, despite this, experts suggest that the absence of a major AI play isn't the sole or primary driver of global investors exiting India.
Weak Earnings and Elevated Valuations
"Brazil has no AI play, yet its markets are doing well," remarked Sridhar Sivaram, investment director at Mumbai-based Enam Securities. He highlighted India's high valuations alongside a "very moderate" earnings growth last year. Indian stocks are currently trading at 21 times forward earnings, similar to Taiwan, while South Korean equities trade at a more modest nine times forward earnings, as per data from research firm Alpine Macro.
Adding to the concerns, global brokerage Nomura has trimmed its consensus earnings estimates for the 256 top Indian companies it covers by 4% for the financial year ending March 2027, primarily due to the reverberations of the Middle East conflict. The declining appeal of Indian equities is evident in the MSCI index, where the country's weightage has shrunk to approximately 11% from its peak of nearly 20% in 2024.
While some of these challenges, such as geopolitical tensions, may ease, long-term concerns are increasingly eroding investor confidence in India's consumption-driven growth story. Yan Wang, chief emerging markets and China strategist at Alpine Macro, points out that advancements in automation and robotics are diminishing the importance of India's low-cost labor advantage, while the rapid adoption of AI raises questions about the long-term prospects for parts of India's IT industry. "Combined with still-rich equity valuations, these factors may continue to limit foreign investor enthusiasm even if geopolitical tensions ease," Wang concluded.
Need to Know
- India's Central Bank Weighs Rate Hike: Similar to Indonesia, India's central bank might consider a surprise benchmark interest rate hike during its monetary policy decision meeting on Friday to defend its currency amidst a weakening rupee and rising inflation, defying expectations for unchanged rates.
- Coca-Cola's India Bottling Unit Listing: Preparations are underway for the potential public listing of Hindustan Coca-Cola Holdings, the U.S. multinational's largest Indian bottling unit, on the Bombay Stock Exchange and National Stock Exchange of India in 2027.
Coming up:
- June 5: Reserve Bank of India monetary policy decision.
- June 5: India GDP data for January-March.
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