After two years of lackluster performance, analysts and market experts were expecting 2026 to be the year of comeback for the Indian stock market.
India's stock market was once growing rapidly. But in the last few years the confidence of investors seems to be decreasing. India's stock market has lagged behind other markets in Asia this year.
Experts believe that a major reason for this is that investors looking for investment opportunities in AI are disappointed by the lack of such companies in India.
According to securities depository NSDL, this year foreign investors have withdrawn more than $26.4 billion from the Indian stock market. Due to this, in the month of May this year, India had fallen from fifth place to seventh place globally in terms of stock market valuation.
But things did not remain stable here. Now India has lagged behind Indonesia in the survey of fund managers of Bank of America. India has now become the least favorite stock market in Asia, even more than Indonesia.
This has happened at a time when the Indian stock market is among the worst performing markets in the world this year and investor concerns are increasing.
According to the survey, the biggest concern regarding Indian stocks is the lack of good companies related to Artificial Intelligence (AI). After this, weak economic growth has emerged as the biggest concern.
32% of the fund managers surveyed have expressed their intention to reduce their stake in the Indian stock market. Apart from this, lack of reforms and high prices of shares are also among the main reasons for the negative attitude of investors.
On the contrary, investor sentiment towards Indonesia has improved. While in July, 32% of fund managers were talking about reducing their stake in the Indonesian market, in August this figure dropped to 27%.
Taiwan and Japan still remain the most preferred markets for investors. A total of 98 fund managers managing assets worth $272 billion took part in the survey conducted between August 7 and 13.
American media outlet Bloomberg has written in its report, "The results of the survey also match the decline in Indian stocks in the last two weeks." This decline has come at a time when the earnings estimates of companies have improved. This indicates that despite strengthening fundamentals, investors are cautious about the Indian market.
Global funds have invested more than $4 billion in Indian stocks this quarter, the highest among the region's emerging markets, after record outflows in the first half, according to Bloomberg data. Earnings of companies included in the NSE Nifty 50 grew by 18% in the recent three-month period compared to the previous year, while Motilal Oswal Financial Services was expected to grow by 10%.
The Indian stock market was last named the least favorite market in a Bank of America survey in May. At that time, after the US-Iran war, the pressure on India's economic growth had increased due to the rise in global crude oil prices. With no signs of resolution to the conflict, energy prices are rising once again, affecting investor confidence.
Although the Nifty 50 is up eight per cent from its recent low of March 50, it is still the second-worst performer among Asia's major stock markets this year.
There has been a decline of about eight percent since the beginning of the year. Along with this, the possibility of the Indian market breaking its historical streak of 10 consecutive years of annual growth has also increased.
On the other hand, the improving investor sentiment regarding Indonesia is due to the rise of more than 20% in its Jakarta Composite Index from the June low.
Arvind Chari, chief investment strategist at Quantum Advisors India, told the British newspaper Financial Times in June, "Global investors invest based on themes. If you want to play AI as an investment theme, there is really nothing to do in India."
The Financial Times wrote in one of its reports, "Foreign investors have reduced their stake in India's huge IT services sector by more than one-third since the beginning of this year." This is a sign that investors are cautious about how AI could impact the industry, which is the largest white-collar employment sector in India.
"India does not have a major presence in major language models like ChatGPT or Cloud and there is also no major chip manufacturing industry in the country. Apart from this, India imports about 90 percent of its energy.
Analysts at Morgan Stanley wrote in June that the biggest persistent challenge for the stock market is the "absence of any major investment opportunities directly related to AI" in India. Additionally, the potential impact on Indian services exports due to AI is making the situation more difficult.
According to NSDL data, the stake of foreign investors in the Indian IT sector with big companies like Tata Consultancy Services (TCS), Infosys has declined from $ 60 billion at the beginning of 2026 to $ 38 billion as of May 15, i.e. a decline of more than 36%. In comparison, the total stake of foreign investors in the Indian stock market declined by 15% to $701 billion during the same period.
India is proud of being the fastest growing large economy in the world and Prime Minister Narendra Modi has set a target of making India a developed country by 2047.
But youth in the world's most populous country are struggling with lack of opportunities. Last month, a large number of youth took to the streets and expressed their dissatisfaction.
These demonstrations of Gen Z started with anger over a paper leak issue. But within a few weeks the movement had become an expression of widespread discontent. The youth feel that the political leadership of the country is ignoring their concerns and aspirations.
The problem is serious. India has the largest youth population in the world. According to estimates, there are about 37 crore youth in the age group of 15 to 29 years in the country.
More young people are studying now than ever before, but many are realizing that even a hard-earned and often expensive degree is no guarantee of a good job.
On May 20, former RBI Governor D Subbarao also wrote in the English newspaper Hindustan Times that India is lagging behind in technology.
Subbarao had written, "Foreign investors moved their money out of India and moved towards other markets in search of better opportunities across the world." Globally, capital is now being attracted to technology-based economies, especially AI, biotech and data centers. India is still a rapidly growing economy, but its role in these cutting-edge technology areas appears limited. As money is moving towards the innovation economy, pressure on the rupee is almost certain to increase.
Subbarao had written, "India's foreign exchange reserves are still around 700 billion dollars, which is one of the largest reserves in the world. But this should not lead to over-confidence. In normal times this amount may seem huge, but in times of crisis its real importance lies in its credibility.
