The big clear trend in equity markets for almost two years has been the global artificial intelligence (AI) theme. Through the first half of 2025, there have been signs that technology ETFs are consolidating out of their A.I.-led rally. Here’s a look at whether Indian markets (read: technology-linked indices and large-cap exporters) could see a correction and how investors can brace themselves for it in an objective, data-driven way.
Decoding the World’s AI Boom — and Its Slowdown
AI as an Investment Fad
Beginning in early 2023 and continuing through mid-2024, AI disrupted corporate strategy, capital allocation, and investor beliefs. The companies that sit in the center of compute infrastructure, cloud platforms and applied AI – Nvidia first among them, followed by Microsoft, Alphabet and AMD – all provided outsized returns to shareholders. AI-themed ETFs experienced inflows in the hundreds of millions and quarterly earnings calls more consistently put forth productivity gains, automation roadmaps and inference workloads as durable sources of growth.
Global Warnings and Market Response
By late 2025 in fact leading institutions were warning of the need for caution. Analysts from international investment banks highlighted a temporary drop in AI-exposed stocks following an overstretched valuations run. This prompted markets to rotate into defensive names like utilities and consumer staples. This was the first meaningful AI index pullback since early 2023 and we saw large-cap leaders give back some gains, while AI-centric funds experienced their early outflows.
What Triggered the Cooling Phase
– Valuation stretch: Trailing P/E multiples in the 50-70x range priced in flawless execution and steady revenue acceleration.
– Profit taking: With a strong advance, institutions rebalanced and took profits in high-beta technology areas.
– Rates and liquidity: A measured global rate trajectory created a tightening of financial conditions and weighed on duration-sensitive assets.
– Earnings conversion lag: Deployments are still in pilot phases for many; revenue scale up has been uneven across verticals.
– External risks: Greater uncertainty premia were associated with virtually emissible supply chains, export restrictions and data policy scrutiny.
India’s Place in the World AI Cycle
Market Resilience Amid Global Volatility
Indian stocks have held up relatively well. The Nifty 50 and Sensex are still not very far from their lifetime highs, underpinned by a broad domestic demand, strong GDP growth and household’s steady engagement with the market through SIPs. But correlation channels — via foreign portfolio flows, client spending of global companies and so on — suggest that India isn’t entirely ring-fenced from global technology sentiment.
Limited Direct AI Exposure
India’s listed tech universe is largely services-oriented. Big cap leaders including TCS, Infosys, Wipro, HCL Tech and Tech Mahindra have been deploying AI in the delivery and consulting around international clients but direct monetization out of a proprietary AI offering has remained small. “What this means is a lower speculative upside when there’s global AI euphoria and a lower downside beta when the AI trade cools.” The result is a more moderate, fundamentals-based path.
Key Market Indicators (October 2025)
– Nifty IT Index: ~37,200 (consolidation; keep an eye on 38,000 resistance and 35,500 support)
– Gold Price (INR per 10 gm): Approaching levels of ₹72,000-73,000/ 10 gm (Risk averse; safe haven allocation increasing)
– India VIX: 14.8 (slight rise in volatility from the recent lows)
– US 10-year yield: ~4.2% (limits appetite for global liquidity)
FII weekly flows: ≈ -₹2,800 crore (selective de-risking; see if trend continues)
Central Bank Perspective
Policy commentary has emphasized prudence. That gold is becoming more of a gauge of global uncertainty only emphasizes the requirement to handle portfolio risk authoritatively and not simply extrapolate from recent returns. It makes sense for India also (having both a structural growth premium and valuation premium) to see interim periods of multiple compression as global conditions tighten.
Risks, Scenarios, and Portfolio Construction
Short-Term Risks
IT income sensitivity: Global clients can decelerate discretionary projects, which could affect the revenue growth visibility and margin profiles.
Foreign flows: Index heavyweights and high valued midcaps could see some pressure if FIIs remain cautious.
Currency Headwind: A strong dollar is likely to weigh on the rupee; exporters will gain while importers could battle headwinds of rising costs.
Mid-/small-cap valuation stretch: Higher valuations in pockets increase the risk of larger drawdowns when we are in a “risk-off” period.
Long-Term Structural Strength
India’s multi-year thesis — formalization, digital (formal and financial services) public digital infrastructure, supply-chain diversification, renewable capacity addition and defense manufacturing — continues to be valid for us. The penetration of AI is expanding into BFSI, healthcare, logistics and manufacturing while investments heighten in data centres and edge compute. Even when slow to Dolled-up listed-market monetisation will take time but government initiatives such as Digital India 2.0 and IndiaAI provide directionality, even if repeatedly hacked at.
Three Possible Futures for the Next 6–12 Months
– Base case (likely): Sideways to modestly positive index returns; sector rotation; IT consolidates with cyclicals and defensives offsetting.
– Bearish (risk case): Bigger global AI correction leads to 5-7% drawdown in India; opportunity emerges in quality leaders on valuation reset.
– Bullish (surprise): We see faster AI monetization and easier global financial conditions brightening risk appetite; IT joins after cooling of valuations.
Actionable Portfolio Playbook
– Asset allocation discipline: Sample mix for a diversified equity investor – 60% core (banking, energy large cap consumption), 25% tech (staggered entries) and 15% stabilizers (gold/debt/liquid funds).
– Phased accumulation: favour SIPs and staged entries instead of lump sum buys; add on 5-10% dips in quality names.
– Position size and risk: Fixed stop losses for all trading positions; avoiding leverage during volatile periods.
– Look for sturdy cashflows: Focus on high ROE/ROCE companies that have excellent balance sheets and governance.
– Be a smart hedger: Gold ETFs or balanced advantage funds are hedge against volatility.
Checklist for Investors and Traders, How to Implement
– Follow the FII/DII flow trends on a weekly basis and observe inflection points.
AI pipeline reference material: quarterly commentary of major IT exporters.
– Watch global macro (Fed trajectory, global yields, credit conditions) and sector-level earnings revisions.
– Be liquid, for opportunities presented by orderly corrections.
– Review quarterly; avoid concentrating theme risk.
Broader Economic Context and Outlook
India maintains one of the more sound macro profiles versus other large emerging markets: growth north of 6.5%, moderate inflation compared to peers, good FX reserves and steady corporate earnings momentum. These towers buttress medium-term equity returns even as global narratives adjust. As AI infrastructure and talent pipelines mature, listed-market winners should broaden from services to product, design, semiconductors adjacencies. The 2025 consolidation phase is better understood as preparation for the next wave of adoption during 2026–2030.
Conclusion
And the cooldown in AI stockmania is a rational reset, not a structural break. Restricted direct AI access limits...d its downside bera but strong domestic fundamentals support the medium-term direction. “Investors who are disciplined about valuations, focusing on the right first-phase assets and maintaining conservative exposure limits when deploying money, will continue to be rewarded as the next leg of AI-driven productivity growth ultimately passes through into listed earnings.
People Also Ask (FAQs)
Why the AI stock rally is running out of steam
Things like Valuation excess, profit booking and tighter global liquidity are forcing the narrative town's attention toward earnings durability. Consolidation typically follows extended advances.
Will Indian markets correct sharply?
A deep correction isn’t the base case. A mild pullback is feasible if global risk aversion flares but India’s home-grown flows and fundamentals are supportive.
Which Indian firms stand to gain from AI in the long-run?
Those investing in applied AI and automation – like Tata Elxsi, LTIMindtree, Persistent Systems and Tech Mahindra — are well placed to multiply as the adoption picks up.
Is IT stocks a good buy now?
Favour accumulation on dips in high-quality IT export names/staggered accumulation with strong cash flows and governance. Do not chase momentum if it’s inevitable or to try to catch up, after a sharp up-move.
