Foreign investors have turned net buyers of Indian equities in July after a record $29 billion selloff in the first half of 2026, marking their first monthly purchase since February. According to Jefferies' Global Head of Equity Strategy Christopher Wood, the earlier outflows were driven by the AI-led rally in Korea and Taiwan, with the shift coming as money began rotating out of the AI trade. Foreign investors bought a net $1.8 billion of Indian equities through July 15, as the global AI trade shows signs of cooling. Wood noted that India has remained 'the inverse AI trade', with the July inflows coming as part of a rotation away from AI stocks.
Foreign capital could rotate to India as the global artificial intelligence trade loses momentum, according to Bandhan AMC's Chief Investment Officer Manish Gunwani. Speaking to CNBC TV18, Gunwani noted that investors who benefited from AI-led rallies in markets such as the US, Taiwan and South Korea could increasingly look at India as valuations become more attractive. India offers a decent risk-reward where valuations are reasonable, with the domestic economy remaining reasonably strong despite global uncertainties. The latest developments show US chip stocks experiencing significant losses, with companies like Micron and Intel seeing substantial drops in stock values, as investors reassess the sustainability of the AI-driven rally.
The rotation may create an opening for Indian largecaps after years of dramatic underperformance, with Jefferies now seeing scope for tactical mean reversion. The Nifty Midcap 100 has risen 99% since the beginning of 2023, compared with a 33% gain for the Nifty 50, with the Nifty 100's one-year forward price-to-earnings ratio at a 33% discount to the Nifty Midcap 150, significantly wider than the 10-year average discount of 20%. 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%. Corporate fundamentals remain resilient, with Jefferies expecting revenue growth for companies it covers to accelerate to a 13-quarter high of 16% in the June quarter.
Despite foreign selling pressure, domestic investors continue to provide strong market support through systematic investment plans. Systematic investment plans contributed ₹318 billion in June, accounting for 87% of equity mutual fund inflows, with steady domestic savings continuing to support valuations despite foreign selling. This domestic cushion has been crucial in maintaining market stability during the global AI trade rotation. The persistent SIP flows demonstrate the underlying strength of India's retail investor base and their commitment to long-term market participation.
Real estate remains one of Gunwani's top domestic bets, with leading developers trading below their net asset value and positioned to benefit even if IT services growth slows. He remains constructive on manufacturing over the next few years, supported by policy initiatives and India's long-term export opportunity. However, he cautioned investors against paying excessive valuations for companies producing standard manufactured components, preferring sectors such as steel products and engineering instead. In quick commerce, Jefferies prefers the market leader over smaller rivals, citing execution and industry economics, adding that high cash burn among competitors could eventually lead to industry consolidation.
While foreign flows show signs of returning, Jefferies warns that renewed conflict around the Strait of Hormuz and the risk of higher energy prices remain significant headwinds for an economy dependent on imported crude. The rupee's weakness adds pressure as it has declined 11.1% against the dollar since the beginning of 2025. A resurgence in equity supply could provide another constraint, with monthly equity issuance jumping from $1 billion in April to $6.5 billion in June. Despite these challenges, the cooling AI trade and India's attractive valuations create opportunities for tactical mean reversion, particularly in large-cap stocks which trade at wider discounts to mid-caps than their long-term average.
