In just over a week, the Indian stock market has dropped from being the world's fifth largest to the seventh largest by market capitalization. After being overtaken by Taiwan last week, India has now slipped below South Korea as artificial intelligence-driven rallies in these markets propel them to new highs. However, the fall to seventh place is not solely due to the rallies in South Korea and Taiwan; it also reflects a record exodus of foreign capital from Indian stock markets over recent quarters.
Why Are Taiwan and South Korea Stock Markets Rallying?
The rally in both Taiwan and South Korea has been driven by the global semiconductor push. In Taiwan, Taiwan Semiconductor Manufacturing Company (TSMC) has been a major beneficiary of the AI wave. In South Korea, Samsung Electronics and SK Hynix have led gains. The rise in Taiwan's market cap is notably skewed: TSMC, which has rallied 50%, now accounts for over 40% of the total market capitalization of the Taiwan stock market.
South Korea's market capitalization has surged to $5 trillion, an 86% increase this year, with Samsung and SK Hynix benefiting from the AI memory-chip boom. In contrast, India's market capitalization has declined to $4.8 trillion.
India's Stock Market Fall in Numbers
The BSE Sensex hit a lifetime intraday high of 86,159.02 on December 1, 2025, after a volatile year. Since then, the market has dropped over 13%, with losses exacerbated by the US-Iran conflict since early March 2026. While stock markets in the US, Japan, South Korea, and Taiwan are hitting lifetime highs, Indian stock markets—once a favorite among foreign investors in emerging markets—have seen a double-digit decline. IT sector stocks, which have rallied globally, are down over 20% in India.
Foreign portfolio investors have been net sellers in most months this year. In May alone, foreign investors withdrew Rs 32,963 crore from equities. For 2026 so far, total outflows by foreign portfolio investors from equities have reached around Rs 2.3 lakh crore, surpassing the Rs 1.7 lakh crore selloff in all of 2025, according to NSDL data. The cumulative value of foreign portfolio holdings in Indian shares has dropped to its lowest level since 2016.
Why Have Indian Stock Markets Fallen So Much?
Several factors have contributed to the decline in Sensex and Nifty over the past year and a half. Some investors believed markets were overvalued after a rapid rally in 2024. Concerns over capital gains taxation have also weighed. A significant portion of the global stock market rally has been driven by the artificial intelligence boom, and market experts believe India has missed that opportunity for now. The US stock market, South Korea, and Taiwan have benefited from surging technology stock prices, eclipsing global economic turmoil.
For example, Nvidia in the US, the world's most valuable company with a market cap over $5 trillion, has rallied over 63% in the last year. In contrast, Indian IT majors like TCS and Infosys have seen stock declines due to fears of AI-driven workflow disruptions. Infosys is down over 22% year-to-date, and TCS has plunged over 24%.
With the imposition of 50% tariffs on India in the second half of 2025, foreign investors fled, causing the rupee to depreciate and become the worst-performing Asian currency. Stability began in February 2026 with the US-India trade deal and tariff reduction to 18%, leading FPIs to turn net buyers. However, the outbreak of the US-Iran conflict resumed the selling spree. Investors worldwide are rushing to safe-haven assets like the US dollar, causing sharp sell-offs. Rising crude oil prices have ballooned the import bill and strained foreign exchange reserves, adding external sector pressures. While analysts remain confident in India's domestic growth story, the inflationary impact of rising petrol and diesel prices keeps investors on edge.
What's the Outlook?
Analysts expect quarterly earnings to pick up, but the US-Iran conflict will continue to determine short-term market direction. Some positive signs are visible. VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, believes a sustained rally in Indian stock markets requires resolution of the US-Iran conflict. He notes that rallies in South Korea and Taiwan are largely led by a few companies, raising sustainability doubts. "A rally in the Indian market would require resolution to the West Asia crisis and a decline in Brent crude to around $85, which would help earnings recovery in H2 FY27," he says.
"South Korean Kospi is up 99% YTD, Taiwan's Taiex up 55% YTD, while Nifty is down 10.9% YTD. For over a year, these markets have done exceptionally well driven by huge demand for semiconductor and memory chips due to massive AI investments," Vijayakumar adds. Taiwan's TSMC now accounts for nearly 45% of its market cap, while Samsung and SK Hynix make up 50% of South Korea's. "These are unprecedented numbers. The AI trade and dominance in semiconductors have enabled these markets to boom, but the risk is that this boom may not last long. There is a view that there is a bubble in AI stocks," he cautions.
Tanvi Kanchan, Associate Director at Anand Rathi Share and Stock Brokers Limited, says the shift is almost entirely an AI story. "The surge highlights intense AI-driven optimism triggering a global rally in tech shares, disproportionately benefiting manufacturing hubs like Taiwan and South Korea. India, by contrast, has been grappling with surging energy costs, slowing corporate earnings growth, and a lack of companies directly linked to the AI buildout," she explains. Global funds sold nearly $24 billion of Indian equities as they chased the AI boom in Taiwan and Korea. India's weight in the MSCI EM index fell sharply from around 19% to 12%.
"After domestic equities underperformed emerging markets by nearly 25% and global equities by around 15% in 2025, as India Inc's earnings growth collapsed from 20% plus CAGR to just 5-6%, India's outperformance now rests on two key factors: a cooling of the global AI frenzy and a meaningful pickup in earnings growth," she notes. The analyst believes the earnings downgrade cycle appears to have bottomed. After five consecutive quarters of depressed earnings, consensus now expects a pickup, with MSCI India earnings growth estimates at 13% for CY25 and 16% for CY26. The macro scaffolding is firmer: India's FY26 delivered a rare Goldilocks combination, with GDP growth well above 7% and headline inflation at just 2.1%, the lowest in decades.
"On valuations, prolonged consolidation has done its work. Large-cap valuations have dipped below their 10-year premium to global and emerging markets, while the Nifty and mid-caps trade near their long-term average P/E, creating entry points that reward patient capital. The structural thesis of financialization of savings, demographic dividend, policy-driven capex, and deepening equity culture remains intact," she concludes.
