July 31, 2026, (Inside AI) — A sharp reversal in the global artificial intelligence trade is breathing new life into India's long-ignored stock market, with software exporters leading a rally as investors flee crowded AI positions. The Nifty IT index surged 16.7% in July, its best monthly showing in years, while the Philadelphia Semiconductor Index tumbled 21% over the same period.
This rotation marks a dramatic shift for Indian equities, which had lagged Asian and emerging-market peers throughout 2025 and the first half of 2026 precisely because they lacked AI heavyweights. Now, that absence has become a shield. As AI-linked stocks in South Korea and Taiwan suffer steep declines, India is drawing fresh capital from global funds looking to de-risk.
The beneficiaries are clear. Goldman Sachs noted in a July 29 report that the Nifty IT index outperformed U.S. chipmakers by the widest margin for any month since 1999. The broader Nifty 50 rose 2% in July, contrasting with a 24% drop in South Korea's technology-heavy KOSPI and a 7% decline in Taiwan's benchmark.
Behind the numbers is a fundamental sector rotation. Todd McClone, a portfolio manager at William Blair Investment Management, which oversees about $65 billion, said his fund turned positive on India in April and added to positions in June after the central bank moved to support the rupee.
"India has emerged as the 'obvious destination' for investors trimming their exposure to North Asian and U.S. technology stocks," McClone said.
Foreign investors bought more than $1.6 billion worth of Indian equities in July, a cautious but notable reversal after selling roughly $29 billion in the first six months of the year. The inflows coincide with improving earnings sentiment and the Reserve Bank of India's currency measures, which have helped stabilize the rupee.
Major brokerages have taken notice. HSBC upgraded India to "neutral" from "underweight," while UBS lifted its rating to "attractive" from "neutral." Goldman Sachs and Bernstein have flagged the prospect of a second-half rebound for the Nifty 50.
Yet the AI rotation is not the only force at play. Ji Young Park, senior Asia ex-Japan equity portfolio manager at Amundi, which manages $2.8 trillion in assets, said the firm was "constructive" on India as concerns over high oil prices were largely reflected in valuations. Park expects the rotation to persist as sectors like financials, healthcare, and industrials become more attractive. However, she cautioned that the IT rally could be tested by an uncertain earnings outlook amid AI-led disruption.
India's Earnings Rebound Fuels Optimism
The durability of foreign inflows hinges on two factors: a recovery in corporate earnings and de-escalation of Middle East tensions. After several lackluster quarters, there are signs of a turnaround. McClone said Indian corporate earnings were moving "onto an upward trajectory" after slowing in 2024 and 2025.
"India could emerge as one of the few markets where growth remains sustainable compared with the rest of the world," said Mayuresh Joshi, head of equity research, India, at William O'Neil & Company.
The shift mirrors a broader recalibration of global tech bets. As AI hype cools, investors are rediscovering value in markets with less froth. India's benchmark indexes, dominated by financials and traditional IT services rather than chipmakers or AI platforms, offer a natural hedge. The Nifty IT index includes firms like Infosys and TCS, which are more tied to global enterprise spending than to AI infrastructure buildouts.
Historical patterns offer some context. During the 2000 dot-com bust, Indian IT stocks also benefited as investors rotated away from overvalued tech names. Today's dynamics echo that flight to quality, though the scale and speed of AI's reversal remain unprecedented. The Reuters market data shows the divergence accelerating in late July.
Still, risks linger. The AI trade could reignite if major tech firms report stronger-than-expected earnings, pulling capital back to North Asia and the U.S. And India's own IT sector faces structural questions about how AI will reshape its outsourcing model. For now, though, the rotation is a welcome reprieve for a market that had been left behind.
McClone summed up the mood: "India is set up for a strong second half of the year."
The coming months will test whether this is a tactical shift or the start of a deeper re-rating. As the AI trade unwinds, India's old-economy strengths are suddenly looking new again.
