India’s underperformance relative to major global markets has been significantly tied to the global artificial intelligence (AI) rally, rather than to weaknesses in its domestic economy, according to a recent strategy report by Motilal Oswal Financial Services titled The Eagle Eye – May 2026.
The report indicates that markets in South Korea, Taiwan, and the United States have outperformed due to their substantial involvement in the global AI sector, notably in AI hardware and semiconductor-related businesses. “Since CY24, India’s headline underperformance has been largely driven by global AI trade, where markets like Korea, Taiwan, and the US have significantly outperformed,” the report states.
Motilal Oswal noted that India’s limited participation in the AI-led surge is primarily a ‘structural’ issue. “The divergence is structural. India’s lower exposure to AI hardware and the narrow, concentrated nature of the global AI rally have limited participation, thereby overstating overall market weakness,” the report elaborates.
Furthermore, the brokerage highlighted that when excluding the IT services sector, India’s overall market performance appears more resilient. “India’s ex-IT performance gap is meaningfully narrower, indicating relatively resilient broader equities,” the report asserts.
As per the findings, South Korea has emerged as the top-performing market globally in the calendar year 2026, seeing a 53% increase in USD terms, followed by Taiwan with a 33% increase and Brazil at 28%. In contrast, India’s Nifty index has decreased by 13% in USD terms over the same timeframe.
The report also suggests that if there is a slowdown or reversal in the global AI sector, foreign investment flows may shift back toward domestic markets like India, which are oriented towards growth. “With AI trade having run for an extended period, any potential unwinding or rotation could redirect FII flows toward structurally strong domestic growth markets like India,” it states.
In terms of defense stocks, the report cites rising geopolitical tensions as a critical factor driving a sharp increase in global defense stocks. “Rising geopolitical tensions and the resultant surge in defense spending and orders have driven a significant turnaround in global defense companies,” it notes.
The market capitalization of global defense firms has reportedly expanded at a compounded annual growth rate (CAGR) of 19% from CY21 to year-to-date CY26, reaching approximately $3.5 trillion.
Motilal Oswal also warned that high crude oil prices and the strength of commodities could continue to exert pressure on global markets and corporate earnings. “Crude prices spiked in FY26 and remain elevated amid West Asia tensions and supply disruptions, raising concerns over growth, current account deficits (CAD), inflation, INR depreciation, and fiscal balances,” the report cautions.
Domestically, the report observes that domestic institutional investors (DIIs) have remained strong buyers, even in the face of ongoing foreign institutional investor (FII) selling. “DIIs invested $5.4 billion, marking the 12th month of over $5 billion in monthly inflows,” it adds, while FIIs have recorded net outflows of around $21 billion year-to-date in CY26.
Published on May 9, 2026.
