India seen as hedge against AI bubble, says Bay Capital white paper

Bay Capital flags several warning signs around the AI trade itself. Hyperscaler capital expenditure is projected to hit $200-220 billion in 2025, roughly 2.5 times 2021 levels

Bay Capital Investment Advisors has argued that India’s exclusion from the global artificial intelligence investment boom positions it as a potential beneficiary when the AI cycle corrects, according to a white paper released.The India-focused fund manager contends that foreign portfolio investors who sold Indian equities to chase AI-driven opportunities in Taiwan, South Korea and China will reverse course once sentiment around AI normalises. The firm identifies FY27 as a likely inflection point for Indian market outperformance.Capital rotationThe scale of capital rotation away from India has been significant. Foreign portfolio investors pulled out approximately $23 billion from Indian equities in 2024 and a further $13 billion through November 2025. Over the same period, Taiwan attracted $34 billion in FPI inflows on the back of its semiconductor and AI supply chain exposure, South Korea drew $22 billion, and China $18 billion. India was the only major emerging market to record net outflows, with the white paper attributing this directly to its negligible 0.2 per cent weight in the MSCI AI Index and zero representation in the Nasdaq AI Leaders Index.Bay Capital flags several warning signs around the AI trade itself. Hyperscaler capital expenditure is projected to hit $200-220 billion in 2025, roughly 2.5 times 2021 levels. An MIT report from August 2025 found that despite $30-40 billion in enterprise investment in generative AI, 95 per cent of organisations are reporting zero return. The paper also draws parallels to the telecom-fibre build-out of the early 2000s, noting that much of current AI infrastructure spending is debt-funded.Despite the FPI exodus, domestic liquidity in India held firm. Monthly SIP inflows reached ₹21,000 crore and mutual fund assets under management rose 27 per cent year-on-year to ₹65 lakh crore, absorbing sustained foreign selling, a phenomenon the paper describes as structurally unprecedented among emerging markets.Bay Capital argues India’s strong GDP growth outlook of 6.7 per cent annually through FY28, multi-year low inflation and recent structural reforms make it well-placed once global capital returns to fundamentals.Published on July 31, 2026