Indian shares end July with gains as foreign inflows return on AI unwinding

Indian benchmark indices ended July on a firm footing, notching monthly gains as foreign investors returned to domestic equities, drawn by upbeat corporate earnings and a global retreat from crowded artificial-intelligence trades. The Nifty 50 settled 0.27% higher on the final trading day of the month, while the Sensex closed in the green amid mixed cues from global markets.

The monthly advance marks a turnaround from the previous few weeks, when heavy selling by foreign portfolio investors had pressured valuations. Market participants said the shift in sentiment was driven by a combination of strong domestic earnings and a recalibration of global portfolios away from AI-heavy technology stocks.

Foreign inflows return

Foreign institutional investors (FIIs) turned net buyers in July, a reversal from the outflows seen in the early part of the quarter. The unwinding of AI-related trades globally, particularly in the US technology sector, prompted many global funds to redeploy capital into relatively cheaper markets like India.

"The AI trade has been the dominant theme for the past 18 months, but the recent pullback has forced global investors to look for value elsewhere," said a Mumbai-based fund manager, requesting anonymity. "India's earnings delivery has been consistent, and that is drawing inflows."

Data from the exchanges showed that FII buying was particularly strong in financials, autos, and consumer discretionary stocks, with selective purchases in information technology.

Bajaj Finance leads the charge

Among individual stocks, Bajaj Finance emerged as the standout performer, surging more than 6% in early trade after the non-banking financial company reported better-than-expected quarterly results. The stock's rally helped lift the broader financial sector, which has been a key driver of the Nifty's gains this month.

Other financial heavyweights also traded higher, with private sector banks and NBFCs seeing robust buying interest. Analysts said the sector's valuations had become attractive after a prolonged consolidation, and strong credit growth numbers added to the optimism.

Autos were another bright spot, with several index constituents posting gains on the back of healthy monthly sales data. However, IT stocks remained under pressure, as the global AI unwinding weighed on the sector's near-term outlook.

Global cues remain mixed

Despite the domestic resilience, global cues were far from uniform. US markets ended mixed overnight, while European indices showed tentative gains. In Asia, Japanese and Chinese markets traded in a narrow range, reflecting investor caution ahead of key central bank meetings.

The US Federal Reserve's policy stance remains a critical variable for emerging markets. A prolonged period of high interest rates could temper risk appetite, while any hint of easing could accelerate inflows into Indian equities.

Domestic institutional investors, who had been net buyers throughout the recent sell-off, continued to provide a floor to the market. Their sustained participation has helped absorb FII selling pressure and has been a key factor in the market's resilience.

What to watch

Looking ahead, market participants will closely monitor the trajectory of global interest rates, the next batch of corporate earnings, and the progress of the monsoon, which has a direct bearing on rural demand and inflation. The August series of derivatives will also provide cues on positioning, especially in the financial and auto sectors.

For now, the combination of strong domestic fundamentals and a recalibration of global portfolios appears to be working in favour of Indian equities. Whether this translates into sustained foreign inflows will depend on how the AI trade evolves and how the global macro picture shapes up in the coming weeks.