FPI buying returns to Dalal Street as global investors rethink AI bets

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Sensex and Nifty gained 1.9% & 2.7% respectively; BSE Midcap 150 and BSE SmallCap 250 fell 4% and 6.3% in Oct.

"Indian large-cap stocks, particularly banks and IT companies, are being viewed as an anti-AI trade, attracting model-driven flows rather than a broad-based return of long-only foreign investors, said Ritesh Jain, founder of Pinetree Macro.

"There is a shift in global investment flows because of signs of a deflation in the artificial intelligence (AI) trade," said Jain. "When the AI trade is doing well, money moves from the rest of the world into the US as investors buy dollars to invest in US AI stocks. When they sell these stocks, they also move out of the US dollar."

Indian markets delivered a mixed performance in October. The Sensex and Nifty gained 1.9% and 2.7%, respectively, while the BSE Midcap 150 and BSE SmallCap 250 fell 4% and 6.3%. The Nifty IT index surged 17%.

Overseas markets, meanwhile, saw sharp corrections, with the Nasdaq and Japan's Nikkei falling 5% each, Hong Kong's Hang Seng declining 5.5%, Shenzhen dropping 13.7%, and Taiwan and South Korea's Kospi falling 8% and 14%, respectively.

Fund managers are seeing selective opportunities in India after the recent underperformance, said strategists. "A small portion of the inflows reflected selective foreign investors returning to India on a bottom-up basis, attracted by improving growth prospects and opportunities in certain technology sectors," said Gautam Chhaochharia, head of global markets, India, at UBS.

The recent buying follows a prolonged period of foreign outflows. Between January 1 and October 15, they sold equities worth over $32.7 billion amid the US-Iran war, rising crude oil prices, hardening bond yields, currency depreciation, earnings uncertainty and inflation. They had also sold equities worth over $18.8 billion in 2025.

Though overseas investors bought nearly $6.15 billion in Indian equities between mid-June and August, they pulled out $8.6 billion in September and the first half of October as a spike in global oil prices and hardening of US bond yields heightened risk-off sentiment.

"The recent pressure on Indian markets had been driven more by global factors, including the strength of the AI trade and higher energy prices, than by domestic fundamentals," said Ben Powell, chief investment strategist for Middle East and Asia-Pacific at BlackRock Investment Institute.

BlackRock remains strategically overweight on India and is closely monitoring the recent pace of foreign inflows. "We continue to closely watch the encouraging recent pace of inflows and remain strategically overweight India," he said.