FIIs have pulled out nearly Rs 53,000 crore from Indian equities so far in 2026, yet early signs show them loading up on cyclical and capital-intensive sectors that offer shelter from AI’s creative destruction. IT services has borne the brunt of the exodus, losing Rs 18,784 crore in the first two months, as India is increasingly seen as an “AI loser” with its technology stocks facing a “Kodak moment.”
The flight to safety is stark in the data: metals attracted Rs 17,164 crore in January and February combined, while capital goods pulled in Rs 14,896 crore. Oil and gas, power, and construction rounded out the top five gainers with inflows of Rs 4,441 crore, Rs 2,639 crore, and Rs 2,955 crore respectively, according to NSDL data.
“Buying by FPIs appears to be in the classical AI hedge sectors related to the old economy – largely from cyclical and capital-intensive sectors such as industrials, financials, commodities and power amongst others, which have shown robust growth trends in Q3 earnings and are poised for incremental upgrades ahead,” said Vinod Karki of ICICI Securities.
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The carnage in IT tells the other side of the story. Foreign investors dumped Rs 16,949 crore worth of technology stocks in February alone, following Rs 1,835 crore of selling in January. Consumer-facing sectors also saw heavy outflows, with consumer services down Rs 9,685 crore, FMCG losing Rs 9,448 crore, and telecom shedding Rs 6,658 crore over the two-month period.
“Single-largest selling by FPIs observed in IT services, which does not provide the AI hedge in the Indian equity basket,” Karki noted. “While the AI stock euphoria is receding in the US, the significant investments in the US economy continues with the newer versions of ChatGPT and Claude unveiled in Feb’26, threatening the outlook for traditional IT services.”
The analyst warned that traditional IT services’ weight in the Nifty 50 basket “does not offer the hedge provided by the classical old-economy stocks; instead, are vulnerable to the excessive investments being poured into the AI ecosystem, which could provide exceedingly advanced versions in the months to come.”
December quarter shareholding shows FII allocation in BFSI, covering private banks, PSU banks, NBFCs, and insurance, climbed to 34.7%, up 50 basis points quarter-on-quarter. FIIs remained significantly overweight by 390 basis points in BFSI versus the Nifty 500, where the sector’s weight stood at 30.8%.
FII allocation in oil and gas rose to a five-quarter high of 7.6%, up 80 basis points sequentially and 110 basis points year-on-year in December. The top five sectoral allocations of FIIs in the Nifty 500 accounted for 64.6% of total allocation: BFSI at 34.7%, technology at 8.2%, automobiles at 8.1%, oil and gas at 7.6%, and healthcare at 6%.
On a sequential basis in the December quarter, FIIs raised their weights in oil and gas, telecom, PSU banks, metals, technology, NBFCs, and logistics, while reducing holdings in utilities, consumer, healthcare, autos, and retail.
Global brokerage firm Morgan Stanley recently recommended overweighting financials, consumer discretionary, and industrials while underweighting energy, materials, utilities, and healthcare in its strategy report.
“We expect a recovery in urban demand to aid overall consumption demand,” the bank said on consumer discretionary, adding 300 basis points to the sector. For industrials, also up 300 basis points, it cited “robust government capex and a pickup in private capex.” Financials gained 200 basis points on “rising credit growth and low credit costs,” which are “only partly offset by likely NIM compression,” with deregulation appearing “positive for the banks.”
Commodity play gains traction
CLSA sees base metals as a key beneficiary: “We believe Indian base metal stocks could be a key beneficiary of a higher commodity price on backward integration and domestic sourcing, leading to better spreads.” The brokerage singled out Vedanta as “best placed given diversified commodity exposure – aluminium, zinc and oil,” with mark-to-market analysis indicating a fair value of Rs 1,030 against a base case of Rs 835.
Nomura too doubled down on steel, maintaining that steel is India’s story and global factors, especially China, should have a limited impact on the earnings potential of major steel players. The Japanese brokerage’s bullish stance on the India steel sector is “underpinned by improving domestic price momentum despite global headwinds.”
The rotation into old economy stocks marks a dramatic reversal for a market that spent years chasing growth stories. Now, as AI threatens to upend the technology services model that built India’s outsourcing empire, foreign money is seeking refuge in the unglamorous world of steel mills, power plants, and oil refineries, the very sectors once dismissed as yesterday’s trade.