The recent Nasdaq decline of around 5% in the US has raised concerns about a potential burst of the AI bubble, which could lead to a reversal in foreign portfolio investors (FPI) outflows towards Indian markets, analysts revealed. FPIs had a net equity selling of Rs 32,963 crore in May, with this trend continuing into early June. The total selling in June reached Rs 42,926 crore, totaling Rs 283,662 crore for 2026 so far, as per NSDL data.
Recognizing the importance of FPI inflows in financing the current account deficit and the Balance of Payments gap, both the Central Bank and the government have taken various measures to attract FPI investments. Initiatives such as the government’s announcement of tax exemptions on interest and capital gains from FPI investments in government securities, along with RBI’s absorption of hedging costs on FCNR deposits and other policy changes, aim to boost forex inflows into India, according to Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments Ltd.
These efforts have also contributed to stabilizing the rupee, which rebounded from a low of 96.96 to 94.94 against the dollar by June 5, indicating a positive trend. Analysts suggest that for FPIs to consider investing in India, the dominance of the AI trade, which has been a key driver of FPI outflows from the country, needs to shift. Early indications show signs of this transformation taking place.
Despite global concerns over geopolitical tensions and trade uncertainties, domestic macroeconomic factors have provided some support, helping to mitigate the impact on the markets. Last week concluded with Nifty and Sensex, the benchmark indices, experiencing a decline, although analysts note that favorable domestic economic indicators have helped cushion the extent of the fall.
