Indian equity markets' underperformance, exacerbated by limited exposure to artificial intelligence, is prompting fund managers to adopt volatile high-growth strategies to beat standard market returns, even as foreign investors retreat.
The benchmark Nifty 50 index has risen almost 7% this year, a fraction of the nearly 27% surge in the MSCI Asia ex-Japan index, fuelled by AI-driven euphoria.
"Markets which caught up, like China, Korea, U.S., bounced back largely on that technology trade," Sunil Singhania, founder of Abakkus Asset Manager, told the Reuters Global Markets Forum.
Acknowledging India's lag in the AI trade, he noted that initiatives such as 'Digital India' have created smaller "new age" companies that will become more relevant with scale.
From South Korea's chipmakers to China's hardware ecosystem - semiconductors to robotics - much of Asia's "everything rally" has driven more capital into growth and innovation, further powering the AI frenzy where India is conspicuously absent.
The South Asian country has largely missed the global AI boom after years of under-investment in deep-tech research. While IT firms such as Infosys and Tata Consultancy dominate outsourcing, their business models remain anchored in cost-efficient services rather than AI innovation.
Unlike the US and China - where AI-focused firms are fueling market valuations and investor enthusiasm - India's public markets offer few, if any, pure-play AI stocks.
Instead, investors are betting on sectors such as renewables, electronics, digital platforms and financial services as future growth drivers to compensate for India's AI gap.
Foreign investors (FPIs) have responded by selling $17.6 billion worth of Indian equities this year -- their second-largest outflow on record for the January-to-September period, data from the National Securities Depository showed.
This retreat underscores a growing divergence: while India's long-term growth story is intact, near-term enthusiasm is being soaked up by markets with stronger AI exposure and faster earnings momentum.
"FPIs are already underweight India," said Nilesh Shah, managing director of Kotak Mahindra Asset Management, which oversees $63 billion in assets. "They are unlikely to exit much further, and could return as growth prospects remain intact."
For now, though, domestic investors (DIIs) are doing much of the heavy lifting, cushioning what could otherwise have been a deeper correction.
They have bought equities worth 5.9 trillion rupees ($65.2 billion) this year, provisional data from the National Stock Exchange showed, as supportive monetary and fiscal measures alongside an orientation towards domestic consumption are seen as powerful drivers.
"India is attractive for several reasons," Mark Haefele, chief investment officer of UBS Global Wealth Management. "It got a little heated in terms of valuation, but relative to other things, it looks better now."
Haefele, whose firm manages $4.5 trillion in assets, told GMF that structural reforms and anticipated improvement in geopolitical ties could make India "a diversifier".
Amundi, Europe's largest asset manager, believes that despite its challenges, India presents "a buying opportunity ... because of structural components to its growth," global head of multi-asset solutions, John O'Toole, said. Amundi manages $2.6 trillion in assets.
That optimism is reflected in the country's vibrant primary market, which is expected to raise up to $8 billion through IPOs in the final quarter of 2025, taking total fund-raising this year to more than $18 billion -- the third highest globally after Hong Kong and the United States.
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