Global investors are pulling funds out of India and shifting them into Asian markets that stand to benefit from artificial intelligence (AI) infrastructure, putting India’s stock market at risk of falling out of the world’s five largest for the first time in 3 years.

BeInCrypto, a blockchain media outlet, reported on May 17 that the shift reflects not just weak quarterly earnings but a structural change in which emerging-market allocations are being reshaped around AI exposure.

India’s weight in the MSCI Emerging Markets index fell to about 12 percent recently from about 19 percent a year ago. Since the start of 2026, foreign investors have withdrawn $21 billion from India’s stock market on a net outflow basis. Goldman Sachs estimated that foreign ownership fell to the lowest level in 14 years and dropped below that of domestic institutions for the first time in about 20 years. In an India strategy memo on May 11, Goldman Sachs said large-scale foreign selling could be nearing an exhaustion phase, but weakening flows have already been confirmed.

Markets point to an AI-driven concentration of investment as the main driver of the fund shift. M&G Investments said about two-thirds of the reallocation reflects AI positioning. India’s stock market capitalisation peaked at about $5.73 trillion in September 2024 and has since lost about $924 billion.

Taiwan and South Korea, by contrast, absorbed funds over the same period. Taiwan’s TAIEX has risen about 42 percent so far this year, and South Korea’s KOSPI set new year-to-date highs on the back of strength in AI semiconductors. Inflows continued as bellwether stocks such as TSMC, Samsung Electronics and SK Hynix were classified as direct beneficiaries of expanding AI infrastructure. Indian companies are seen as weaker because there are not many listed firms directly connected to that supply chain.

The sector rotation is spreading beyond equities. S&P Global introduced a hybrid cryptocurrency-stock benchmark that combines large-cap stocks and key AI-linked tokens. As the asset allocation framework is being reshaped around AI, products that bundle traditional equities with digital assets have also emerged.

Within India, the IT services sector is facing the most direct pressure. The Nifty IT index has fallen about 26 percent so far in 2026, while the Nifty 50 has declined by around 9 percent over the same period. Tata Consultancy Services and Infosys, which anchor India’s $315 billion IT services industry, hit 52-week lows after OpenAI announced a new organisation dedicated to enterprise deployments. OpenAI said it launched the OpenAI Deployment Company to help businesses build services around intelligent systems.

The spread of generative AI is also weighing on the existing earnings structure of India’s IT services firms. Generative AI tools are automating coding, testing and back-office tasks, undermining the labour-based business model that has been a strength for these companies. The outlet noted that about 15,000,000 people in India work in IT services and global capability centres, placing a key pillar of the economy on the path of expanding AI agents.

India’s government is also responding. Policymakers are pursuing semiconductor incentives, data centre expansion and a national AI mission. It remains to be seen over the next few quarters whether such investment and policy can reverse the structural capital outflow showing up in India’s stock market.