Foreign outflows from IT stocks at 7-month high in Feb on AI shockwaves

Foreign outflows from India's information technology stocks hit a seven-month high in February, on worries that artificial intelligence-led disruption could squeeze ​earnings.

Foreign portfolio investors sold IT stocks worth ₹16,949 crore ($1.85 billion) for the month. That triggered a 19.5 per cent drop in the IT ‌index, its worst monthly performance since September 2008, when the global financial crisis upended equity markets, National Securities Depository (NSDL) data showed on Friday.

The 10 constituents of the index lost about $62.8 billion in market capitalisation in February after US firms such as Anthropic and Palantir unveiled key updates in AI automation. Last year, FPIs offloaded a record ₹75,000 crore ($8.18 billion) of IT stocks on weaker earnings and softer client spending.

 

"The IT sector is facing multiple headwinds, particularly from the rapid advancement of AI tools," said Piyush Gupta, fund manager at AlphaGrep Investment ‌Management.

Constructive collaborations between Indian IT firms and global AI leaders, such as the strategic partnership between Infosys and Anthropic, and improvement in earnings in the sector will be crucial to restore FPI interest in the sector, according to three analysts.

Yet, February was not a one-way risk-off story. FPIs rotated aggressively into other pockets of the market, lifting overall inflows to ₹226,15 crore, the highest in 17 months since ​September 2024.

The rebound in broader foreign appetite was fueled by improving corporate earnings and easing trade ‌tensions after India sealed a key trade deal with the European Union and an interim framework for an agreement with the US.

Sectors such as capital ​goods, financials, ‌metals, and energy drew strong foreign buying, supported by improving earnings despite a one-time hit ‌from new labour codes.

AlphaGrep's Gupta said that while sturdier earnings and trade progress help the long game, the FPI comeback is likely to be gradual, highly sensitive ‌to ​geopolitics and external ​shocks.

That fragility is already showing.

FPIs net sold ₹17,570 crore of shares in just four sessions in March as the escalating US-Israeli war with ‌Iran spiked oil ​prices and squeezed global risk appetite.