While global equity markets are experiencing robust rallies, with some indices surging by as much as 150% since September 2024, India's Nifty index has notably declined by 8% from its peak in the same period. This divergent trend, highlighted in a recent India strategy note by Motilal Oswal Financial Services Ltd (MOFSL) on May 9, 2026, points to several key factors affecting the domestic benchmark.
Key Factors Behind Nifty's Lag
The sluggish performance of the Nifty, which trades approximately 5% below its pre-war levels even as major global indices reclaim or surpass all-time highs, can be traced to a combination of foreign capital flight, the nature of the global AI rally, and differing earnings expectations.
Foreign Institutional Investor Exodus
Foreign Institutional Investors (FIIs) have been consistently withdrawing capital from Indian equities. So far in Calendar Year 2026, FIIs have logged net outflows amounting to approximately $21 billion. This significant divestment has put considerable pressure on the Indian market, even as Domestic Institutional Investors (DIIs) have stepped up, pumping in roughly $33 billion to partially offset the foreign outflows.
The Concentrated AI Rally
A major driver of the global market rally has been the narrow, concentrated nature of the artificial intelligence (AI) boom. This rally has predominantly favored tech-heavy markets such as South Korea, Taiwan, and the United States, which have greater exposure to AI hardware and related technologies. India, with its lower exposure to these specific segments, has largely remained on the sidelines, thereby overstating its overall market weakness relative to global peers.
“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,” MOFSL noted.
Earnings Growth Disparity
Another contributing factor is the disparity in earnings expectations. Global markets are currently pricing in robust Earnings Per Share (EPS) growth of 20% to 40%. In contrast, India is trailing with an expected EPS growth of only about 18%. MOFSL emphasizes that a sustainable delivery of stronger earnings growth is crucial for reversing India's current underperformance in the global market landscape.
Potential for Reversal
Despite the current challenges, there is a potential silver lining. MOFSL suggests that the global AI trade has been running hot for an extended period. Any potential unwinding or rotation away from this concentrated AI-driven trade could redirect FII flows towards structurally strong domestic growth markets like India. Such a shift could set the stage for a significant reversal in India's relative underperformance, attracting renewed foreign investment and boosting domestic market sentiment.