After a challenging 2025, foreign portfolio investors (FPIs) are showing renewed interest in Indian tech stocks, fueled by growing confidence in the sector's artificial intelligence (AI) capabilities. This shift comes after a year where India was perceived as an "anti-AI" market, leading to significant outflows as global investors chased high returns in AI-linked markets.
The AI Advantage
The renewed investor interest stems from the impressive AI revenue growth demonstrated by leading Indian IT companies. Tata Consultancy Services (TCS) and HCL Technologies, for example, reported quarter-on-quarter AI revenue growth of 17% and 20% respectively in the December quarter of 2024. This progress in monetizing AI investments has boosted confidence in the sector's potential.
Aishvarya Dadheech, founder and chief investment officer at Fident Asset Management, noted that increased confidence around business visibility has made the sector a "tradable opportunity". This positive sentiment is reflected in the market performance, with the NSE gauge of technology stocks poised for its best monthly performance against the benchmark Nifty 50 since November 2024.
India as a Diversifier
Beyond AI, India's appeal lies in its potential to diversify global portfolios. As concerns over an AI bubble grow, fund managers are looking to India's consumption-driven economy, which has a low correlation to AI trade and attractive valuations, as a hedge against tech-heavy global markets.
Raj Singh, multi-asset manager at Principal AMC, suggested that any pause in the AI trade could lead to money flowing into India, given its low correlations with other markets.
Challenges and Opportunities
Despite the optimism, challenges remain. Some analysts point out that India lacks major pure-play AI companies and meaningful exposure to the chip-design, manufacturing, and equipment ecosystem, unlike countries like Taiwan and South Korea.
Additionally, mixed quarterly results from major IT firms present near-term hurdles. However, the long-term AI opportunities, a weakening rupee, and strong domestic growth supported by policy reforms and stable corporate earnings are expected to support the sector's recovery prospects.
Looking Ahead
Market strategists anticipate a potential comeback for FPIs in Indian equities in 2026, as conditions that triggered outflows in 2025 ease. Earnings visibility, reasonable valuations, and macro stability are also turning supportive. Corporate earnings are expected to accelerate, with Nifty earnings projected to grow at around 16% CAGR over FY26-FY28.
While the preference for AI-exposed emerging markets may persist, India's steady fundamentals and improving earnings could attract long-term capital as valuations in AI-heavy markets peak. The Indian IT sector is entering 2026 with a more realistic outlook, focusing on the tangible benefits of AI and its potential to drive growth after a prolonged slowdown.
