AI unwinding real? Analysts decode Indian market impact, sectoral winners

The correction in chip stocks and concerns surrounding the AI trade have the potential to revive FPIs ' enthusiasm for Indian stocks.

After being famously termed 'reverse AI trade' by Jefferies' Christopher Wood in 2025, India's time might just have arrived amid shifting global sentiment against artificial intelligence (AI) stocks. 

 

The writing is on the wall. The tech-heavy Nasdaq is down almost 7 per cent in a month. More importantly, the sector's key barometer, the Philadelphia Semiconductor Index, which includes companies like Nvidia, Intel, AMD, Micron, Broadcom and Qualcomm, is down roughly 24 per cent from its late-June peak, its worst week since March 2025 and technically a bear-market move.

 

Other Asian markets, too, like South Korea and Japan, have slumped 19 per cent and 7 per cent, respectively, after emerging as top performers last year following an AI-led rally.

 

 

But analysts believe that this is more a valuation and positioning unwind, rather than an earnings-led problem. 

 

"What changed is the discount rate: A more hawkish Fed has pushed the 10-year yield to around 4.5 per cent, and that compresses multiples on high-growth names regardless of whether the underlying demand is intact," said Venkatesh Balasubramaniam, MD & head of research, JM Financial Institutional Securities.

 

Balasubramaniam said he would characterise this as a rotation out of crowded, high-multiple positions rather than the unravelling of the AI investment thesis, but cautioned that a V-shaped recovery is unlikely given how stretched positioning had become.

 

Silver lining for India

The correction in chip stocks and concerns surrounding the AI trade have the potential to revive enthusiasm of FPIs in Indian stocks. 

 

"The diversity of stocks available in the Indian market is rare among emerging markets (EMs). At some point, the FPIs will be forced to recognise this and move away from markets dominated by a single stock or two stocks as in Taiwan and South Korea," opined Dr VK Vijayakumar, chief investment strategist, Geojit Investments. 

 

The money has started to flow from other EMs into India, with NSDL data showing that FIs have net purchased Indian stocks worth ₹14,946 crore so far in July. This marks the first such instance after February when they poured ₹22,615 crore. 

 

But with oil remaining at uncomfortable levels of $95-100 per barrel, inflows will likely get delayed. 

 

Divam Sharma, co-founder and CEO, Green Portfolio, said, "India will get a share of that reallocation — a domestic-demand economy compounding at this pace is exactly what global money should reach for next. But I won't say that it's a clean tailwind."

 

He cited pricey valuations and external risks like oil as challenges. "Meaningful allocations on the growth story are likely, but the scale and timing hinge on how oil and those costs behave."

 

Echoing similar sentiment, Balasubramaniam said, "India can be a relative beneficiary of capital rotating out of crowded global tech positions. Foreign investors did turn net buyers in July after four months of selling. But we wouldn't characterize it as a clean, unambiguous tailwind. It's a genuine two-way pull between rotation-driven inflows and oil-driven outflow risk."

 

Likely sectoral winners of FPI inflows

The data for the first 15 days of July shows that consumer services, metals and mining, and healthcare remained the top buys by FPIs in terms of equity investments with net inflows of ₹7,361 crore, ₹5,993 crore, and ₹4,101 crore, respectively. READ MORE

 

Against this backdrop, Sharma opined that he would focus on sectors where the growth is domestic and structural. He finds auto as a key beneficiary given it is a direct play on consumption and premiumisation. Defence, a multi-year indigenisation and order-book story that's relatively insulated from global risk swings, along with energy, broadly, including the capex build-out around it, are other sectors where he expects inflows to gain steam.  

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