Global Tech Rotation, Not Foreign Plots: Explaining the FII Exit from Indian IT
Indian equities—especially IT services—are facing outsized FII outflows and heavy index shorts, spawning a rumour that “foreign powers” are sabotaging the market. The evidence says otherwise: FY26 Q1 prints across Indian IT were soft; global consulting peers flagged cautious demand; and capital has rotated toward AI-infrastructure supply chains in Taiwan and Korea offering better near-term earnings momentum. August’s FII outflows spiked and short ratios rose to extremes, but similar caution shows up in the U.S. and European IT-services complex and across emerging markets when the dollar and tariff headlines bite. In short, this is global cycle and positioning—not a geopolitical hit job.
Think of investors like shopkeepers moving goods from shelf to shelf. Right now, the “hottest aisle” is AI hardware—chips, memory, data-center gear—so money is flowing to Taiwan and South Korea. Indian IT companies, which mostly sell people-and-process services, are in a slow patch because big overseas clients delayed non-essential tech projects. When global funds move money away, prices fall here and rise where the money goes. That looks dramatic—and rumours fly—but it’s the same store, just different shelves getting restocked.
The Context and Rumour
The chatter in Indian markets claims that foreign powers are deliberately pushing FIIs to sell and damage Indian equities. Such narratives thrive in moments of volatility. But a closer look at the timeline shows this is merely the outcome of global sector rotation, macroeconomic pressures, and valuation realignments. This article examines flows, earnings, and cross-market comparisons to demonstrate why the “foreign sabotage” thesis is flawed.
Chronology of Market Events
The first half of 2025 saw U.S. tariff uncertainties, a firm dollar, and risk aversion across emerging markets. Indian IT companies reported subdued Q1 FY26 earnings, with major players like TCS, Infosys, and Tech Mahindra flagging delayed projects and slower decision cycles. In August, FIIs recorded their steepest monthly outflow of the year, with financials and IT bearing the brunt. At the same time, AI-infrastructure companies in Taiwan and South Korea reported record profits and raised guidance, drawing global capital their way.
Flow Comparisons and Global Parallels
Data on FII outflows from India aligns closely with trends in other emerging markets during the same period. Indonesia, Brazil, and South Africa also saw pressures when the dollar strengthened. What makes India look sharper is the heavy concentration of selling in IT and financials. Meanwhile, Taiwan and Korea benefited as AI hardware names like TSMC and SK Hynix surged. In other words, money didn’t vanish—it rotated.
Earnings Revisions and Sector Dynamics
The fundamental driver of these flows has been earnings revisions. Indian IT services reported single-digit revenue growth with management commentary highlighting weak discretionary spending. Global peers like Accenture and Capgemini reported similar caution. Meanwhile, AI-infrastructure players enjoyed upward revisions, record exports, and strong demand visibility. Investors are naturally shifting to where earnings momentum is strongest.
Positioning and Market Microstructure
FIIs also added to net index-futures shorts in August, magnifying the selling pressure. Academic literature shows that outflows tend to trigger sharper negative price reactions than equivalent inflows do positive ones. This asymmetry fuels the perception of “attacks” even when the flows are routine reallocations. Domestic institutional investors, on the other hand, continued their steady buying, cushioning the blow.
Empirical Tests
Regression models of Indian FII flows show strong correlations with U.S. yields, dollar strength, and sector earnings revisions. Event studies also confirm that India IT underperforms most visibly after positive AI hardware results abroad, consistent with rotation rather than sabotage. Once you adjust for these factors, India’s experience is indistinguishable from other service-heavy economies facing similar global headwinds.
Rebutting the Myth
The conspiracy theory that foreign powers are deliberately damaging India’s markets collapses under scrutiny. The selling coincides with global capital reallocations, weak sectoral earnings, and macro risks. Even if governments occasionally invoke “foreign hand” narratives, the data shows India’s market swings are part of broader emerging-market cycles. Tax or GST tweaks at home cannot counter client demand cycles abroad, especially when India’s IT revenue is denominated in dollars and euros.
Policy and Investor Implications
For policymakers, the lesson is to focus on strengthening India’s export competitiveness and avoid conflating normal capital flow cycles with national security issues. For investors, the signals to watch are: return of discretionary IT spending, covering of FII shorts, clarity on tariffs, and margin improvements as AI investments become accretive.
Conclusion
When the chronology, flows, and earnings fundamentals are placed side by side, the narrative of “foreign powers sabotaging India’s markets” simply doesn’t hold. The selloff is textbook global rotation: FIIs are reallocating away from slower-growing IT services into faster-growing AI-infrastructure supply chains, while tariff and dollar headwinds add short-term pressure. India’s IT sector is under stress, but not under attack.
This analysis has been prepared with expert insights from Statscope India Research, whose deep sectoral diagnostics make clear that the drivers are structural and global, not conspiratorial.
Darshan Walawalkar, Partner at Statscope India Research, observed: “In today’s age, it’s easy for rumours to spread, especially among the large number of middle-class youth employed in the IT sector. The best option is for the youth to adapt to new technologies such as AI and be prepared to become the next-gen workforce—because AI will leave behind everyone who’s not ready.”
