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AI Hype Reversal Could Trigger Massive FII Return to Indian Markets

A report from Bay Capital argues that a reversal in the artificial intelligence investment hype could refocus global capital on India's strong economic fundamentals. It notes that massive FII outflows from India coincided with the AI boom, as investors sought direct AI infrastructure exposure elsewhere. However, India's limited direct exposure to semiconductor and data center infrastructure may create asymmetric upside when markets return to fundamentals. The country is instead emerging as a powerful AI application economy, leveraging efficiency gains across its vast domestic market.

Key Points: AI Hype End May Bring FIIs Back to India, Says Report

  • AI infrastructure is debt-funded with low ROI
  • India's market seen as optimal post-hype
  • FII outflows hit $23B in 2024
  • India has strong macro fundamentals
  • Rapid growth as an AI application economy
2 min read

AI hype reversal could bring back FIIs to India creating huge upside

A Bay Capital report suggests the end of AI hype could refocus global capital on India's strong fundamentals, reversing major FII outflows.

"If 'Sell India' was the allocation choice for investors seeking AI exposure, then 'Buy India' should logically become the preferred choice when the AI hype reverses. - Bay Capital report"

New Delhi, Jan 8

A reversal of the artificial intelligence hype could bring India back into focus for large global investors, a report said on Thursday.

The report from Bay Capital said "much of the global AI infrastructure build‑out is debt‑funded," echoing risks last seen in the telecom‑fibre boom.

It also cited a finding that despite $30-40 billion in enterprise investment into generative AI, 95 per cent of organisations are getting zero return.

"India's market composition -- viewed today as a disadvantage in the AI-obsessed investment landscape -- may prove optimal" when the AI hype ends.

"India's under-indexing to a potentially hyped theme creates asymmetric upside when capital markets return to fundamentals," the report said.

It noted that India has limited direct exposure to AI infrastructure such as semiconductor manufacturing and hyperscale data centre ecosystem. Though India may not be building foundational AI infrastructure, it is rapidly emerging as an interesting AI application economy, creating a powerful efficiency multiplier across its vast domestic market, it said.

From hyperscalers accelerating capital expenditure to an unprecedented surge in semiconductor-drive equity valuations, the AI trade has reshaped capital flows, investor sentiment, and global asset allocation.

India's perceived non-participation in the global AI boom has resulted in a sharp reallocation of foreign capital. Foreign portfolio investor outflows touched around $23 billion in 2024 and $13 billion year‑to‑date in 2025, the report by India-focused investment manager said.

"If "Sell India" was the allocation choice for investors seeking AI exposure, then "Buy India" should logically become the preferred choice when the AI hype reverses," the report noted.

Even as FPIs have rotated aggressively out of India, India's macroeconomic foundation remained among the strongest in the world. Contributing 9 per cent to global GDP growth (around 18 per cent on purchasing power parity basis), India's economy is expected to compound at over 6.7 per cent from FY25-FY28, the fastest in the G20, the report noted.

- IANS

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Reader Comments

S
Sarah B
The stat about 95% of organizations getting zero return on their GenAI investment is shocking. It does feel like a bubble. If capital flows back to fundamentals, India's consistent growth story looks very attractive.
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Aditya G
Finally, some sense! All my friends in the US are only talking about NVIDIA and chips. Meanwhile, our startups are using AI to improve farming, logistics, and education. That's real value creation. The FIIs will be back.
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Priyanka N
While the long-term view is positive, the report glosses over the pain caused by the $23 billion outflow. That's real money leaving our markets, affecting valuations and sentiment. We need policies to ensure stability regardless of global fads.
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Karthik V
"Efficiency multiplier across its vast domestic market" - this is the key. AI in India isn't about building the most powerful chip, it's about making a *lakh* of small businesses more efficient. That's a huge, sustainable opportunity.
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Michael C
Interesting take from an Indian fund manager. The debt-funded AI infrastructure build-out does echo the dot-com and telecom busts. A flight to quality and fundamentals would definitely benefit a growing economy like India's.

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