‘AI is real, but valuations is bubble,’ Is the rally sustainable and what happens to Indian investors if it cracks?
SkimNews Take
Indian IT's selloff isn't contingent on an AI bubble bursting — the labor-arbitrage model is structurally exposed to the same automation Big Tech is spending $725 billion to deploy.
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- Big Tech (Microsoft, Alphabet, Amazon, Meta) is set to spend close to $725 billion on AI in 2026, up from $410 billion last year, which means less free cash flow and more interest payments.
- Paresh N. Bhagat of Mangal Keshav Financial Services argues that AI itself is not a bubble, but that certain AI-related stock valuations may be, with prices having risen faster than expected earnings.
- Cloud providers AWS, Azure, and Google Cloud are still growing 28 to 120 percent, suggesting underlying demand remains strong despite valuation concerns.
- Indian markets have already absorbed the early shock: over ₹2 lakh crore in FII exits over four months, the Nifty IT index dropped 6% on AI fears, and Indian AI proxy companies fell 7-8%.
- Shashank Udupa of Vayu Capital warns that "everything is priced on good news" — a single negative headline could devastate the sector, with South Korea named as the most exposed market globally.
- Domestic institutional investors (DIIs) are now absorbing most of the FII selling in India, providing a cushion against a US-led unwind, though multiple zones of euphoria and falls are expected.
Why it matters: Indian investors are already experiencing the transmission: ₹2 lakh crore in FII outflows over four months and a 6% Nifty IT drop show the AI valuation correction is no longer hypothetical. With $725 billion in spending commitments from cash-rich giants like Microsoft and Alphabet, any air pocket would punish overvalued AI-adjacent names — DII buying has been the only buffer so far.
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