India Misses AI Rally: A Structural Gap?

India's stock market has experienced notable underperformance compared to global peers, largely attributed to its minimal involvement in the current artificial intelligence (AI) rally. Markets such as South Korea, Taiwan, and the United States have seen significant gains due to their substantial exposure to AI hardware and semiconductor-related businesses.

This divergence is described as structural, with India's limited participation in the AI hardware sector being a key factor. Excluding the IT services sector, India's broader market performance appears more robust, indicating underlying resilience in domestic equities.

Analysts suggest that a potential unwinding or rotation within the global AI trade could redirect foreign investor flows towards structurally strong, domestic growth markets like India. This presents a potential opportunity for Indian markets to attract renewed investment.

Meanwhile, geopolitical tensions have spurred a 19% compounded annual growth rate in the aggregate market capitalization of global defense companies since 2021, reaching $3.5 trillion. Elevated crude oil prices, however, continue to pose risks to global markets and corporate profitability, impacting growth and fiscal balances.

Domestically, Indian institutional investors remain strong buyers, with over $5.4 billion invested monthly, contrasting with sustained foreign institutional investor selling of approximately $21 billion year-to-date in 2026.