Foreign investors have significantly reduced their holdings in Indian equities in 2025, pulling out over Rs 2.07 lakh crore, or roughly $25 billion, as they redirect capital towards the booming global artificial intelligence (AI) sector.^[1][2][3][4] This substantial outflow highlights a global trend where investors prioritize markets seen as "AI winners" over those with less direct exposure to the rapidly advancing technology.^[1][2][5] This shift has made India a "natural funding market" for AI-driven global capital flows.^[3] ### AI Investment Surge Attracts Global Capital Global investment in artificial intelligence has seen explosive growth, making it a powerful magnet for capital worldwide. Corporate AI investment reached $252.3 billion in 2024, marking a 25.5% increase from the previous year.^[6][7] Private investment in AI also climbed by 44.5% during this period.^[6][7] Generative AI, a key driver of this boom, saw its funding soar to $33.9 billion in 2024, an 18.7% rise from 2023 and more than 8.5 times higher than 2022 levels.^[6][7] The United States leads this investment race, with its private AI sector attracting $109.1 billion in 2024 alone.^[6] This amount is nearly 12 times higher than China's $9.3 billion and 24 times the UK's $4.5 billion.^[6] Experts project continued expansion, with Goldman Sachs estimating global AI investments will hit $200 billion by 2025.^[8][9] The overall global AI market, valued at over €130 billion in 2023, is expected to reach nearly €1.9 trillion by 2030. Thi^[10]s rapid growth positions AI as a "general purpose technology" capable of delivering substantial productivity gains across economies. Ove^[11]r the past year, the AI trade added $6 trillion in market capitalization to the US stock market, while China saw an addition of around $700 billion. ##^[3]# India Perceived as "AI Loser," Funds Diverted This global rush into AI-focused markets has directly impacted foreign investment flows into India. Foreign Institutional Investors (FIIs) have offloaded Indian equities worth over Rs 2.07 lakh crore (approximately $25 billion) in 2025 so far. Thi^[4]s includes a staggering Rs 1,16,574 crore sell-off between January and March, and another Rs 76,619 crore in the July-September quarter. In ^[1]November 2025 alone, FIIs sold Rs 12,569 crore. Thi^[1]s marks one of the heaviest outflows from India in recent years. FI^[2]Is, particularly hedge funds, are actively selling in India and buying into markets perceived as "AI winners," such as the US, China, South Korea, and Taiwan. V K^[1][5][4] Vijayakumar, Chief Investment Strategist at Geojit Investments, noted this perception "is hugely influencing the FPI action in the ongoing global rally driven by AI trade." Ind^[1][5]ia is widely seen as an "AI loser" because it lacks significant integration into the global AI value chain and has few pure-play AI companies listed on its exchanges. Rid^[3][12][13]ham Desai, Managing Director at Morgan Stanley India, stated, "India does not really offer an AI trade." Ind^[2]ia has not developed foundational Large Language Models (LLMs), nor does it design or manufacture high-end semiconductor chips for generative AI. Ins^[13]tead, its listed market remains dominated by traditional players like banks, industrials, and consumer companies. Th^[3][12]e Indian IT sector has felt a direct hit. FII ownership in Indian IT stocks has dropped sharply from 10.3% to 7.4%, with foreign investors selling $4.1 billion worth of IT shares recently. Kot^[14]ak, a leading financial firm, predicts AI could lead to a 2-3% annual revenue decline for Indian IT companies over the next three years. Thi^[14]s is due to AI potentially replacing some traditional IT services, leading to lower earnings and impacting demand for outsourcing. ##^[2][14]# High Valuations and Underperformance Contribute to Outflows Beyond the AI narrative, other factors have made Indian equities less appealing to foreign investors. High valuations in the Indian market, coupled with muted earnings growth in some sectors, have prompted FIIs to book profits. The^{[2][3][15][16][12]} Indian stock market significantly underperformed global indices in 2024. For instance, the Sensex and Nifty saw modest annual returns of 8.9% and 9.6% respectively, while the S&P 500 jumped 25.2% and the NASDAQ-100 gained 27.6%. In ^[17]dollar terms, the MSCI India Index is down 1% in the last year, making it one of the worst-performing major markets globally. Fo^[3]reign investors are redirecting capital from expensive Indian equities to markets hosting AI leaders like Nvidia, TSMC, and Samsung. Add^[3]itional reasons for FII selling include rising interest rates in the United States, a strengthening US dollar, and broader global recession fears. The^{[15][16][18][19]}se factors make higher-yielding assets in developed markets more attractive, drawing funds away from emerging markets like India. ##^[16]# Shifting Landscape: Opportunity for India? Despite the recent outflows, some experts believe a potential reversal could be on the horizon. The rapid surge in AI stock valuations has led to concerns about a possible "bubble" in the sector. V K^[1][20][4] Vijayakumar of Geojit Investments stated that AI-focused companies have reached levels where "any further rally risks turning into a bubble poised to burst." If ^[1]these AI valuations correct or show signs of fatigue, capital could flow back into markets that have been overlooked, including India. Ros^{[1][2][20][3][4]}s Maxwell, Global Strategy Lead at VT Markets, believes that if AI-heavy stocks continue to correct, "the attractiveness of diversified, growth-focused markets such as India could strengthen." In^[3]dia's strong domestic fundamentals, driven by consumption-led growth and improving corporate earnings, could make it an attractive alternative. Ind^[1][2][3][4]ia's GDP growth is above 6%, and moderating inflation has kept its fundamentals strong. Ana^[3]lysts expect Nifty earnings to rise 10% in fiscal year 2026 and 17% in fiscal year 2027, supported by strong performance in financials, infrastructure, and consumption sectors. Rob^[3]ust domestic flows from retail investors have also helped cushion market volatility. Fu^[2][3]rthermore, India is actively investing in its own AI infrastructure. Google, for example, announced a $15 billion investment in an AI data center in Andhra Pradesh last month, its largest commitment to the subcontinent. Thi^[21][22]s highlights India's growing role in shaping the future of AI. A r^[22]ecent FII Institute-Accenture report suggests a significant shift, with 87% of global investors planning to increase AI investments in the "Global South," including India, Southeast Asia, and the Middle East, within the next 12-24 months. Thi^[23][24]s potential pivot could rebalance global technology development and support new AI innovation outside traditional hubs. Adv^[24]antages cited for investing in the Global South include a competitive talent base, affordable energy, robust digital infrastructure, and strong domestic demand. Th^[24]e global AI trade has undeniably pulled significant money away from Indian equities in 2025, driven by investor pursuit of high-growth AI opportunities in other markets. However, as global AI valuations face scrutiny, India's robust domestic economy and emerging AI infrastructure could soon attract renewed foreign interest, potentially reversing current outflow trends.