Indian stock market, shorted by AI, sees a recovery: IT stocks rebound strongly, while banking, power, and pharmaceutical sectors favored

According to Zhihui Finance APP, against the backdrop of intense volatility in global AI trades, the Indian stock market has rebounded, with the Nifty IT Index surging nearly 19% in July. ICICI Prudential Asset Management, India’s second-largest asset management company, is betting on banking, refining, power, and pharmaceutical sectors, optimistic about the investment opportunities driven by demand.

Sankaran Naren, Chief Investment Officer at ICICI Prudential Asset Management, stated that banking valuations are attractive. In addition, rising demand in power infrastructure and medical fields has created highly appealing investment opportunities. The company manages assets worth about 11.8 trillion rupees (equivalent to $123 billion), with equities accounting for more than two-thirds of its total assets.

"Banking remains one of the most attractive industries in India," he said in an interview on Wednesday.

Valuations of Indian banking stocks near five-year lows

These comments from India’s veteran fund manager Naren come as Indian corporate earnings show signs of recovery. Naren is a proponent of contrarian and value investing concepts in India. Data shows that raw materials, utilities, and financial services are the sectors leading the recovery. Of the Nifty 50 Index constituents, 34 have disclosed June quarterly earnings, with more than half surpassing market expectations in terms of profits.

Improved earnings prospects have pushed the Indian benchmark Nifty Index to rise for a second consecutive month. In addition, the return of foreign capital inflows and a rebound in Indian software stocks have boosted the market. However, Naren noted that the surge in Brent crude oil prices above $90 per barrel poses a risk to this recovery.

He said: "If earnings growth improves, but macroeconomic risks rise—such as oil prices reaching $100—then the market will assign lower valuations. The ideal scenario is profit improvement with stable oil prices and favorable monsoon conditions."

The $9 billion ICICI Prudential Multi-Asset Fund managed by Naren has outperformed 95% of similar funds over the past five years. The fund's holdings reflect his views: it has consistently overweighted bank stocks, and in recent months has increased positions in Kotak Mahindra Bank, HDFC Bank, and Union Bank of India.

"Continuous selling by foreign investors has made valuations of many large-cap stocks highly attractive," he said.

In March this year, foreign capital withdrew largely from the Indian stock market, selling a total of $6.5 billion in financial stocks and causing the Nifty Bank Index to approach bear market territory. Since then, the index has rebounded over 13%, but its current price-to-book ratio is still about 20% below the long-term average.

Besides financials, Naren is also optimistic about the power and pharmaceutical tracks. He believes that the increasing power demand will drive investment in power generation and transmission grids. Pharmaceutical companies, on the other hand, benefit from globally competitive export businesses and the growing domestic healthcare needs. He reiterated his long-term bullish view on the pharmaceutical industry.

He said: "The pharmaceutical sector has consistently brought us handsome returns. We still see this sector as attractive."

Sector rotation spawns recovery! Nifty IT Index surges in July

It is noteworthy that after recording its worst first half in 18 years, India’s Nifty IT Index staged a strong rebound in July, rising nearly 19%—its largest single-month gain in six years—as investors rotated from crowded AI trades to relatively undervalued technology stocks.

Previously, the market was concerned that AI technology would disrupt the business model of India's IT outsourcing industry, leading to a deep correction in the Indian tech sector. In the first half of 2026, the Nifty IT Index, viewed as the benchmark for Indian tech stocks, fell about 30%, making it the worst-performing sector in India, compared to a roughly 9% drop for the broader Nifty 50 Index in the same period.

In terms of capital flows, foreign investors made a net withdrawal of over $23 billion from India’s stock market in the first half of 2026. There was even talk that India was the first country to be “shorted” by AI, with pessimism spreading into capital markets and the long-term economic outlook.

However, as AI chip stocks corrected recently, capital began rotating into Indian IT services, viewing it as a relatively lower-risk tech sector. Jefferies upgraded its rating on the Indian IT industry from “underperform” to “neutral,” which boosted market sentiment.

Corporate earnings have also sent positive signals. Tata Consultancy’s AI business posted annualized revenue of $2.6 billion; Infosys stated that AI-driven services contributed 8.2% of total revenue.

Nevertheless, not all market observations have turned optimistic. Wright Research founder Sonam Srivastava reminded that the current rally is more a recovery after deep value corrections, rather than a new upward cycle driven by demand. Mid- to long-term issues such as the challenge AI technology poses to traditional outsourcing models and weak discretionary corporate spending remain unresolved.

Independent market expert Ajay Bagga pointed out that July’s rebound may be just a short-term phenomenon, with the real test lying in the order data for the September quarter—to determine whether this round is a structural reversal or merely a technical rebound after overselling.