Investors stung by AI may turn to India, lured by domestic demand: Analysis

India's story of growth, insulated from AI exposure, could propel its markets to the front of investors' minds and draw back foreign cash, as a shakeout in bets on artificial intelligence gathers pace elsewhere.

Left behind and sold by foreigners ​through a years-long rally in everything tied to computing and AI infrastructure, India's "anti-AI" equity market ​is starting to catch up, as the South Asian nation's growth prospects and currency strength improve.

That could turn around last year's ‌departure from the market of a net $21 billion in foreign cash.

"Once that AI theme plays out and you are again looking at the market for sustained long-period growth, there is no such story like India," said Prateek Agrawal, chief executive of Motilal Oswal Asset Management Company in Mumbai.

 

"Long-period growth will come from newer emerging spaces ... which will be the big businesses of tomorrow."

Some of that is yet to be reflected in market indexes, he said. But the shifting mood is captured in this month's flow of about $1.5 billion in net foreign purchases of stock.

At the same time, the rupee currency is off record lows after India struck a long-awaited trade agreement with the Trump administration.

India's Nifty 50 has fallen less than 1 per cent over the period from October 29, when the Nasdaq, owned for its high-growth, tech-heavy potential, hit a peak before losing more than 5 per cent.

"There's enough excitement - demographics, consumption, policy-making - all of those tailwinds are in India's favour," ‌Rahul Saraf, head of investment banking at Citi India, told the Reuters Global Markets Forum.

"Steady domestic inflows and an active dealmaking market support higher multiples, and continue to drive growth and M&A activity."

It's the economy

The optimism is fuelled by India's near $4-trillion-dollar economy, projected to grow 7.4 per cent in the fiscal year that ends in March 2026, according to the latest annual economic survey, and at 6.7 per cent next year and 7 per cent the year after, according to S&P.

The driver of that growth is consumption, which could be all the more attractive as it is insulated from AI and not really dependent on foreign trade, or the global economy, either.

"It's domestic demand, and you have that diversity in terms of the actual ​growth (in India)," Amirul Feisal Wan Zahir, managing director at Malaysian sovereign fund Khazanah Nasional Bhd, told GMF at Davos in Switzerland.

"From (an) investment perspective, there'll ‌be more capital deployed in this area rather than going to the United States. And with that, we'll have more growth going forward."

To be sure, shares have suffered in the "software-maggedon" wipeout of about $1 trillion in market value that chipped about $50 billion from the market ​cap of IT services ‌firms such as Infosys and others in India in February.

Price is another a perennial stumbling block. The Nifty 50 trades at roughly 22 times its ‌12-month forward earnings, slightly above a long-term average of 20.8 times, against a forward P/E ratio of 13.6 for the MSCI emerging markets index.

But that is not expensive, according to Citi's Saraf, while others see it as justified by the high and steady growth.

India, ‌along with ​China and Brazil, ​is among UBS's "preferred markets", in part reflecting growth and compelling domestic drivers, the bank told Reuters.

"Part of the high valuation in India is because it has very high growth rates," said Nadir Godrej, managing director of Godrej Industries, warning that a ‌downturn could test investor confidence. "I'm ​very optimistic about India."