Foreign Selling In India Slows As AI-Focused Emerging Market Trade Loses Momentum

The heavy foreign capital rotation that favoured artificial intelligence-linked Asian markets and commodity-driven economies over the past year is beginning to weaken, according to Elara Securities. The brokerage said outflows from Indian equities have moderated in recent weeks as the broader emerging market trade loses pace.

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Emerging markets recorded their sixth straight week of outflows, with investors pulling out another $8 billion during the latest week. This followed cumulative withdrawals of $24.4 billion over the previous 15 weeks.

China-focused domestic funds remained the largest source of pressure. Since April 2026, these funds have seen nearly $79 billion in redemptions, according to Elara Securities.

Global Emerging Market (GEM) funds also continued to witness withdrawals. GEM funds reported outflows of $738 million this week after investors had already withdrawn $2.6 billion over the previous eight weeks.
South Korea, Taiwan See Pressure Build

Elara Securities said the recent weakness has largely been concentrated in long-only active funds, while exchange-traded fund (ETF) flows have remained marginally positive.

The brokerage noted that global investors had sharply increased allocations toward South Korea and Taiwan since April 2025 to benefit from the artificial intelligence-led rally in semiconductor and technology stocks. Brazil had also attracted flows due to strength in commodity-linked trades.

India, meanwhile, emerged as one of the primary sources of funding for these allocations, leading to sustained foreign selling in domestic equities over the past several months.

However, the trend has started to lose momentum. South Korea witnessed a record foreign outflow of $1.3 billion three weeks ago and saw an additional $587 million exit during the latest week.

Taiwan has also started reporting slower inflows and increasing redemption pressure. Brazil recorded its largest weekly outflow since December 2024, with investors withdrawing $230 million.

Elara Securities said the flow trend that had dominated emerging markets since April 2025 now appears to be weakening.

India Outflows Moderate From March Peak

Foreign selling in India has slowed significantly compared with earlier months. India-focused funds reported outflows of $702 million in May, lower than $1.5 billion in April and substantially below the record $3.5 billion withdrawn in March.

India-dedicated funds have also shown signs of stabilisation after experiencing nearly $6 billion of outflows across 11 consecutive weeks.

ETF inflows have continued to absorb part of the selling pressure even as long-only funds remain under strain.
At the same time, Japan-based allocations to India recorded an outflow of $150 million, indicating that overseas investor sentiment toward Indian equities remains cautious despite the recent moderation in withdrawals.

The latest flow data suggests the aggressive global rotation away from Indian equities may be approaching a pause as enthusiasm around AI-driven and commodity-led trades starts cooling across emerging markets.