India’s record $29 billion foreign selloff wasn’t a verdict on the market but collateral damage from the global rush into AI stocks in Korea and Taiwan, according to Jefferies’ Global Head of Equity Strategy Christopher Wood. He says FIIs will return in force only if the AI trade has peaked or Indian equity valuations fall sharply.
The first trigger may now be emerging. Foreign investors bought a net $1.8 billion of Indian equities through July 15, their first monthly purchase since February, as money began rotating out of the AI trade.
The shift, while still modest compared with the scale of the preceding selloff, could signal that globabaggl investors are beginning to reconsider a trade that has left India on the wrong side of the AI-driven market rally.
“India as a stock market has remained the inverse AI trade,” Wood wrote in his latest GREED & fear report. The July inflows, he said, have come as part of a rotation away from AI stocks.
Wood argued that the unprecedented selling was driven less by a deterioration in India’s fundamentals and more by the pressure on emerging-market investors to chase surging technology hardware stocks elsewhere in Asia.
“The main driver of this foreign selling was nothing to do with India,” he wrote.
Dedicated emerging-market funds raised cash by selling Indian shares and deploying it into Korea and Taiwan during the first half. Korea’s neutral weighting in the MSCI Emerging Markets Index surged from 9% at the beginning of 2025 to 23.7% at the end of the latest quarter, intensifying the reallocation away from India.
What will bring FIIs back in force?
The July turnaround is an encouraging signal, but Wood cautioned that a sustained return of foreign capital will require a bigger catalyst.
Foreigners will need either to conclude that the AI trade has peaked or see Indian equity valuations fall substantially, he said. The recent rotation makes the first possibility increasingly relevant, while the second appears less likely without a sharp reversal in domestic mutual-fund flows.
There is no evidence of such a reversal yet.
Monthly systematic investment plan contributions reached Rs 318 billion in June, accounting for 87% of equity mutual-fund inflows. SIP investments totalled an annualised Rs 3.63 trillion during the 12 months through June.
Wood described continuing domestic mutual-fund inflows as the main positive for the Indian stock market, providing a powerful buffer against foreign selling and helping sustain valuations.
Also Read | Christopher Wood warns of AI fatigue. Why Jefferies is turning to India and China
Is the largecap trade returning?
The rotation may also create an opening for Indian largecaps after years of dramatic underperformance against the broader market.
The Nifty Midcap 100 has risen 99% since the beginning of 2023, compared with a 33% gain for the Nifty 50. That outperformance was underpinned by stronger earnings: the Nifty Midcap 150 delivered annualised profit growth of 18% during the past two years, against 8% for the Nifty 100.
Jefferies now sees scope for tactical mean reversion.
Largecap earnings growth is expected to accelerate to an annualised 14%-15% over the next two financial years, while midcap growth is projected at about 20%. At the same time, the Nifty 100’s one-year forward price-to-earnings ratio is at a 33% discount to the Nifty Midcap 150, significantly wider than the 10-year average discount of 20%.
The earnings gap is therefore expected to narrow just as the valuation gap has widened, strengthening the tactical case for selective largecaps.
Corporate fundamentals also remain resilient. Jefferies expects revenue growth for the companies it covers, excluding oil and gas, metals and financials, to accelerate to a 13-quarter high of 16% in the June quarter. It forecasts 14% earnings growth for the MSCI India universe in the current financial year, up from an estimated 10% in FY26.
Oil remains the key risk
The renewed conflict around the Strait of Hormuz complicates the emerging foreign-flow recovery because of India’s dependence on imported energy.
Wood said there is a limit to how far the government can shield consumers from rising fuel costs. Higher subsidies could also raise questions about whether planned infrastructure spending will need to be reduced.
The rupee’s weakness adds to the pressure. The currency has declined 11.1% against the dollar since the beginning of 2025, making any moderation in foreign selling a relief from a capital-account perspective.
A resurgence in equity supply could provide another constraint. Monthly equity issuance jumped from $1 billion in April to $6.5 billion in June, with promoter and private-equity exits accounting for about 75% of supply during May and June, according to Jefferies.
For now, however, the decisive variable is the global AI trade. India was among its biggest casualties as foreign capital chased technology hardware elsewhere in Asia. If that trade is starting to lose momentum, July’s inflows may represent more than a brief interruption to the record selloff.
( Disclaimer : Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
