The correction in semiconductor stocks and concerns surrounding artificial intelligence (AI) trading may boost renewed interest from Foreign Portfolio Investors (FPIs) in Indian equities.
Downturn in Global Tech Markets
After Jefferies termed this phenomenon 'AI reverse trading' in 2025, it might be time for India amid a shift in global sentiment towards AI-related stocks. The tech-heavy Nasdaq index fell by nearly 7 percent in a month. More indicative is the Philadelphia Semiconductor Index, which includes companies like Nvidia, Intel, AMD, Micron, Broadcom, and Qualcomm, and dropped by approximately 24 percent from its late June peak, marking the worst week since March 2025 and technically aligning with a bear market.
Other Asian markets, including South Korea and Japan, also experienced declines: 19 percent and 7 percent, respectively, after leading last year due to the AI-driven rally.
Reasons for the Correction and Analyst Views
However, analysts believe this is more of a valuation correction and position reallocation rather than a profit decline issue. Venkatesh Balasubramanian, Managing Director and Head of Research at JM Financial Institutional Securities, noted that the discount rate has changed: tighter Fed policy has pushed the yield on 10-year bonds up to about 4.5 percent, compressing multiples for high-growth companies regardless of sustained underlying demand.
Balasubramanian clarified that this can be viewed as capital outflow from overheated, high-multiple positions, not the collapse of the AI investment thesis itself, but warned that a V-shaped recovery is unlikely due to investors' overly stretched positioning.
Potential for India
The correction in the chip sector and anxieties around AI trading could reactivate FPI interest in the Indian market. Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, suggested that the diversity of available stocks in the Indian market is rare among emerging markets (EM). He believes that at some point, FPIs will be forced to acknowledge this and move away from markets dominated by one or two stocks, such as Taiwan and South Korea.
Money has started flowing from other emerging markets into India; NSDL data shows that financial institutions net purchased Indian stocks worth ₹14,946 crore in July alone. This is the first such instance since February, when they invested ₹22,615 crore.
Challenges and Growth Forecasts
Nevertheless, since oil prices remain at an uncomfortable level of $95–$100 per barrel, the inflow of funds is likely to be delayed. Divyam Sharma, Co-founder and CEO of Green Portfolio, stated that India will benefit from this reallocation because an economy with domestic demand growing at such a pace is precisely what global money should aim for next. However, he did not guarantee that this would be a pure tailwind.
He pointed to issues related to high valuations and external risks such as oil. Sharma added that significant investments in growth history are probable, but the scale and timing depend on oil price behavior and associated costs. Balasubramanian supported this view, noting that India could become a relative beneficiary of capital outflow from overextended global tech positions. Although foreign investors became net buyers in July after four months of selling, he emphasized that this cannot be called an unambiguous tailwind, but rather a real mutual influence between rotation-driven inflows and oil-related outflow risk.
Expected Winning Sectors
Data for the first 15 days of July indicates that consumer services, metals and mining, and healthcare remained the main FPI purchases in equity investments, with net inflows of ₹7,361 crore, ₹5,993 crore, and ₹4,101 crore, respectively.
Against this backdrop, Sharma believes the focus should be on sectors with domestic and structural growth. He sees the automotive industry as a key beneficiary, as it is directly linked to consumption and premiumization. Other sectors where, according to his forecast, fund inflows will start gaining momentum include defense, representing a long-term process of localization and orders, relatively isolated from global risk fluctuations, as well as energy in general, including the development of capital expenditure in this area.
