AI mania drives global markets, India risks being sidelined: Kotak report

India's limited role in the AI value chain and dominance of traditional sectors may keep global investors away until the AI frenzy cools

Artificial Intelligence may be the most powerful market narrative of this decade — but India, for now, is watching the global AI rally from the sidelines.

 

A new Kotak Securities Institutional Equities strategy report titled “With or Without AI” said the explosive rise in AI-related stocks across developed and select emerging markets has been the key driver behind their outperformance in recent years. In contrast, India’s market remains dominated by traditional sectors such as financials, energy, and consumer goods — leaving it largely outside the AI value chain.

 

“The negligible presence of India in the AI value chain and high share of ‘traditional’ sectors in the Indian market may result in India being shunned by global investors until the AI excitement moderates,” the report said.

 

 

According to Kotak’s analysis, AI-related firms in the US, China, Japan, South Korea, and Taiwan contributed between 14% and 58% of the incremental market capitalisation in their respective markets over the past three years.

 

The Bloomberg AI Index, which tracks global AI-related companies, is now the second-largest equity market in the world after the US, with a total market cap of $25 trillion — ahead of China ($13 trillion), Japan ($8 trillion), and India ($3 trillion).

 

Over the last 12 months, the index has gained 48%, and 67% in the last six months alone, which explains the frenzy around AI computing, semiconductors, and infrastructure stocks.

 

Companies such as Nvidia, Microsoft, TSMC, Samsung Electronics, and Broadcom have seen valuations soar on the back of massive spending on AI chips and data centers. Kotak noted that AI firms are now “investing among themselves” — OpenAI’s recent partnerships with Microsoft, AMD, Oracle, Broadcom, and Samsung together exceed $1 trillion in commitments for cloud, GPUs, and AI infrastructure.

 

India’s market is old-schooled

India’s market capitalisation tells a very different story. Kotak’s data showed that the top 25 Indian companies, led by Reliance Industries, HDFC Bank, TCS, ICICI Bank, SBI, and Bharti Airtel, remain concentrated in energy, finance, and consumer sectors.

 

While these firms have delivered moderate earnings growth — around 10–18% annually — they continue to command premium valuations, with average P/E multiples between 20x–30x.

 

“The market’s expectations of Indian stocks appear to be driven solely by income growth, not by innovation,” Kotak observed.

 

In other words, India’s stock market is growing on consumption optimism rather than technological disruption — the opposite of what’s fueling global markets today.

 

Falling Cost of Capital Favors AI Trades

 

Adding to this divergence, Kotak pointed out that US Federal Reserve rate cuts — with another 50 basis points of easing expected in 2026 — could sustain AI-related investments.

 

Lower global borrowing costs reduce the discount rate used in valuing future cashflows, benefiting AI firms that are capital-intensive and back-ended in earnings.

 

The report illustrated this with a simple model: a 1% drop in discount rate boosts the valuation of a company with delayed cashflows by nearly 20%, compared to just 5% for a firm with steady cashflows.

 

This, Kotak said, could extend the AI rally even further.

 

India: A Funding Market, Not a Destination

 

The brokerage warned that India could become a “funding market” — meaning global investors might sell Indian equities to fund AI-heavy trades elsewhere.

 

“The lack of integration of India in the AI value chain and high domestic valuations have made India a natural source of funds for AI-theme-driven global capital flows,” it said.

 

Kotak believed India’s best chance of regaining investor interest could come only if the AI bubble deflates, prompting a rotation back to value-oriented and traditional markets.

 

While most observers agree an AI bubble exists, Kotak said there’s “no consensus on its size, duration, or nature.”

 

However, it also added that a sharp decline in global cost of capital may still benefit select Indian companies that are delivering high growth despite low cashflows — particularly those in digital infrastructure, industrial automation, and analytics. 

"The lack of integration of India in the global-AI value chain and high valuations for most sectors and stocks in India have resulted in India being a natural funding market for AI-theme-driven global capital flows. India’s best hope to regain interest from global risk capital could be a deflation of the AI bubble. Most observers agree about a bubble but there is no consensus on the duration and magnitude or even the nature of the bubble. Nonetheless, a sharp decline in the global cost of capital may still favor select Indian companies, which are currently delivering high growth but are generating low cashflows," noted the report.

 

Outlook and Market Estimates

 

Kotak expects India’s Nifty earnings to grow 10% in FY26, followed by 16% in FY27 and 14% in FY28. It projects Nifty EPS to rise from ₹1,097 in FY26 to ₹1,460 in FY28, implying a forward P/E of 17.8x by FY28.

 

While these are healthy domestic metrics, the global narrative — for now — is being shaped elsewhere. 

Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd