India, for years, had proudly held its position as the fifth largest stock market in the world, powered by strong economic growth, rising consumer demand, and steady foreign capital inflows. But First Taiwan, Then South Korea? How the Global AI Supercycle Is Demoting the Indian Stock Market has now become a growing discussion among global investors as the AI boom reshapes capital allocation priorities across international markets.
But global investors have been busy parking their money in two Asian markets for the past couple of years, which India is currently missing: direct, large-scale play in the AI semiconductor craze. Taiwan came first. South Korea followed. Together they are changing the global equity pecking order and India is taking its toll as it’s happening.
The AI Supercycle: A Capital Shift of Once Generation
Right now, it’s a different kind of a sectoral rally in the AI space. It is a “structural, once-in-a-generation reallocation of global capital,” analysts say, similar in magnitude to the Internet boom of the late 1990s. The Bloomberg AI Index, a measure of the market cap of companies that have AI-related businesses, now has a total market cap of about $25 trillion. That makes up the second largest equity category in the world, with China having $13 trillion, Japan $8 trillion and India $3 trillion.
The Bloomberg AI Index has risen about 48% in the past year, ending in January 2026, of which 67% occurred in the final six months of the period. Capital flowed rapidly and heavily to the market areas with the most direct access to AI computing, semiconductors, and infrastructure hardware. Taiwan and South Korea were in that group. India did not.
Over the last three years, the AI companies in the United States, China, Japan, South Korea, and Taiwan generated a percentage of incremental market capitalization ranging from 14% to 58%, respectively, in their respective countries, according to Kotak’s analysis. In India, it is insignificant. The nation does not have big listed companies with roots in the global supply chain of AI chips — and that is reflected in the allocation prices of institutional money managers.
Taiwan: The TSMC Effect and Policy Tailwinds
The transformation of the Taiwan’s market can be summed up in one name: Taiwan Semiconductor Manufacturing Company (TSMC). TSMC’s leading maker of cutting-edge semiconductors is the biggest hardware enabler of the worldwide AI revolution. From OpenAI’s infrastructure to hyperscaler GPU clusters, all significant AI models rely on TSMC’s chips.
This has fueled Taiwan’s stock market rally. The surge of Taiwan’s stock values were largely driven by TSMC’s stocks, which made up about two-thirds of the gains in the latest cycle.
In addition to the company itself, the financial regulator has also provided structural policy support for Taiwan. The new regulations permit domestic fund investment exclusively in Taiwan stocks to have a maximum of 25% of its net assets invested in one company, when the weight of the company in the stock index exceeds 10%. At the moment, TSMC is the only one that fits into this. The regulatory shift may draw in over $6 billion in new capital to Taiwan, the research note from JPMorgan Chase said, a wager on the semiconductor supercycle.
As a result, Taiwan has surpassed India in terms of total stock market capitalisation. This was a significant indicator for India which had maintained its fifth position in the global rankings due to robust domestic growth over the years. The world’s capital allocation system was changing and semiconductors were now the new currency.
South Korea: Memory, Reforms, and the SK Hynix Surge
The South Korean’s case in the global race for the AI capital is also a very logical one. Taiwan has the technology to make the advanced chips, whereas South Korea is the leader in AI memory, or high-speed memory chips that drive large-scale AI training and inference. One of Nvidia’s primary partners in its efforts to develop HBM (High Bandwidth Memory) has become one of the world’s most important technology stocks: SK Hynix.
South Korea has also coupled its hardware advantage with structural changes in its markets. The country has made changes to its Commercial Code to improve the regulatory clarity of directors’ duties to the shareholders, which directly facilitated higher FII participation. These governance enhancements lifted one of the historical obstacles that international investors were hesitant to invest in Korean companies. The AI memory supercycle, together with the reforms, became a very strong double catalyst for foreign capital.
Both Taiwan and South Korea have turned into pure-play vehicles to the AI semiconductor supercycle, according to analysts. Global money has done just as much, and has moved as quickly and at as large a scale as. The global AI infrastructure race is driving both markets, albeit in different ways, and is making the trade compelling in various ways.
India’s Compounding Headwinds
None of this indicates any major structural failure in India’s economy. Growth rate for GDP during the quarter October-December 2025 was 7.8%. For the first time since mid-2025, the collections of the Goods and Services Tax (GST) have reached the threshold of Rs 2 trillion in March 2026. Numbers of automobiles increased by more than 20% in segments. The domestic consumption and growth engine is alive and well.
But, India is beset with a particular and compound set of headwinds that have made it less attractive in the near-term to the international institutional capital. The figures are stark. Finance experts said in the middle of May 2026, foreign institutional investors had redeemed almost Rs 1.92 lakh crore worth of Indian stocks, which already surpassed the previous year’s entire withdrawal volume in 2025. The total value of all global investors’ trades in India’s shares was around $24 billion so far this year.
The depreciation of the currency has been the second blow. The Indian rupee price of the dollar has appreciated from Rs 85 to almost Rs 95 since January 2025. This currency devaluation affects the dollar returns of foreign investors, even if the overall markets in India are little changed in Indian currency. This moves into a vicious circle where outflows in the equity markets and poor rupee performance make trading less appealing to fresh investors.
India’s representation in the MSCI Emerging Markets Index has also shrunk significantly, from nearly 19% to about 12% this year. Citi said that MSCI India’s underperformance over the past year was mainly due to the rotation away from the AI trade and the increase in crude oil prices compared to emerging markets. In the March 2026 quarter, foreign holdings of Indian stocks dipped to a fourteen-year low and for the first time in more than two decades, foreign ownership fell below the DIO.
The Special Challenge of the IT Sector
The immediate capital rotation is only one of the more specific fears that India’s tech industry has. Indian IT industry has been competitive in the world for the last few decades, based on software services and Outsourcing. With AI automation, however, institutional investors are increasingly beginning to wonder whether the traditional IT outsourcing demand will structurally decrease. But there is a concern that the AI tools developed on the very same chips which are imported from Taiwan and South Korea could diminish the amount of human labour intensive software work that Indian IT firms have always been capable of grabbing.
This worry, however, is under speculation at this moment, and even the Indian IT companies are adapting by investing in the ability of AI in their own ways. But the perception is already impacting foreign portfolio positioning as well as being an additional headwind in addition to the direct AI trade rotation.
The early signs of exhaustion — and what to do next
The AI trade cycle into Taiwan and South Korea seems to have peaked, with emerging signs of saturation. Elara Securities says the global equity inflow for one week was $2.6 billion, just one-fifth of the past five-week average of $22 billion. South Korea’s record $1.3 billion foreign outflow in a single week. The weekly inflow of Taiwan declined from $820m to $160m, the lowest amount in six months. Analysts are closely monitoring these early signs of positioning fatigue as they await the Indian market to be among the early beneficiaries in a likely era of cool valuations for AI.
The sentiment indicator, which India’s Citi had pegged at a very negative level, has come back to neutral. Over the past ten years, in the past year, the Nifty has averaged out to be at the bottom of the high single digits. The demographic, the domestic consumption side, the infrastructure investment side, and the growing middle class side are not going to change in India. The only thing that’s different is the sequence of global capital and it is starting to fatigue.
Frequently Asked Questions
Ans – Large listed companies that participate in the global AI chip manufacturing supply chain are lacking in India. Two clear winners of the AI semiconductor supercycle have been Taiwan (TSMC) and South Korea (SK Hynix). Temporary pullout of money from India as institutional investors move to markets that have a direct exposure to AI hardware.
Ans- In 2025, foreign institutional investors pulled out almost Rs 1.92 lakh crore from Indian equities by early May 2026, more than the record level of outflows in the previous year. So far, the world’s investors sold out about $24 billion in Indian stocks.
Ans- TSMC is the top microchip maker in the world for advanced AI semiconductors and graphics processing units (GPUs). It has been the focal point of Taiwan’s stock market surge, adding about two-thirds of the market’s rally to date.
Yes- No. India’s GDP expanded by 7.8% in Q3 2025, GST collections reached Rs 2 trillion in March 2026 and the sales of automobiles increased by over 20%. There is no damage to the domestic growth engine. The problem is that the Indian economy is strong yet, at the moment, it’s not the exposure to artificial intelligence and semiconductor hardware that investors are looking for.
Ans – Yes. Some analysts, including Citi and Elara Securities, are signalizing what they see as early signs of a rotation from the AI trade. With growth sentiment recovering and fundamentals solid, India is set to be one of the main markets that will be seeing the rotation capital when the AI valuations pull back.
