AI hype reversal could bring back FIIs to India creating huge upside
A Bay Capital report said a potential reversal of the global AI investment boom could redirect foreign capital towards India, whose limited exposure to AI infrastructure and strong macro fundamentals may offer asymmetric upside when markets refocus on fundamentals.
New Delhi: A reversal of the artificial intelligence (AI) 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.
