India has experienced a dramatic $8.5 billion outflow from India-focused funds in 2026, as global investors pivot toward artificial intelligence-linked markets, according to Elara Securities Global Liquidity Tracker. This represents a significant shift as approximately 55% of inflows received by India-focused active funds during the March 2023 to October 2024 period have now been redeemed. The outflows have been primarily driven by Luxembourg- and Japan-domiciled funds, highlighting the selective nature of current investor sentiment toward Indian markets.
India has fallen out of the top 10 constituents of the MSCI Emerging Markets Index for the first time since at least 2000, according to reports from The Times of India. This decline reflects India's position in the global AI race, where the country is barely scratching the surface while competitors like Taiwan are gaining momentum. TSMC alone accounts for 42% of Taiwan's benchmark index due to its advanced chips that power the world's top AI models, highlighting the contrast with India's current capabilities.
Indian AI startups raised nearly $1.5 billion in the March quarter, representing about 38% of all startup funding, as reported by The Times of India. However, this pales in comparison to leading markets like the US and China, where investment flows are significantly higher. Anthropic alone raised $65 billion in recent funding at a valuation of $965 billion, demonstrating the scale gap between Indian and global AI markets. The contrast becomes more pronounced as nearly $50 billion flowed into three ETFs tracking the S&P 500 and US technology sector funds saw record inflows of $19.2 billion in a single week.
India faces significant challenges in building competitive AI capabilities, according to investors cited by The Times of India. The country lacks a competitive position at the foundation model layer and does not yet have an AI-first company generating $40-50 million in annual revenue. As noted by Anup Jain from BlueGreen Ventures, India continues to rely largely on models developed and controlled by foreign companies, despite initiatives like Sarvam AI's Sarvam-30B and Sarvam-105B representing progress toward sovereign AI capabilities.
Indian AI founders are building innovation across the stack, with more focus on the middle-ware layer between foundation models and enterprise deployment, as reported by The Times of India. Poorvi Vijay from Elevation Capital emphasized that "We cannot build serious AI without GPU access at scale." The strategy focuses on taking AI into agriculture, healthcare, climate and financial services at scale rather than competing in the foundation model race, where the global leaders have already established their positions. This approach aligns with the current market trend where investors are becoming more selective within the AI theme, increasingly favoring companies and markets viewed as direct beneficiaries.
The recent move by the US government to restrict foreign access to Anthropic's Fable 5 and Mythos 5 models has highlighted the need for India to step up its own AI capabilities, according to investors cited by The Times of India. While big tech giants Meta and Google are building AI data centres in India, this is insufficient for the country's AI ambitions. The market perception remains that India is not doing enough in building large language models or in areas like semiconductor manufacturing, with investors calling for deeper AI talent in fundamental research and sovereign compute capabilities. The current pattern suggests investors are increasingly selective within the AI theme, favoring companies and markets viewed as direct beneficiaries rather than broader peripheral ecosystems.
