South Korea’s Kospi index had more than doubled until the crash so far in 2026, raising concerns that the AI-led rally had become overstretched. (Image generated using AI)The Reserve Bank of India (RBI) has warned that a sharp correction in global equity markets, particularly if driven by a reassessment of corporate earnings growth and elevated valuations in AI-related stocks, could spill over to domestic markets.AI-related investments are now permeating other segments of capital markets, including bond markets, the RBI said in its Financial Stability Report (FSR). Many markets, including South Korea, Taiwan and Japan, had recently witnessed a boom and high volatility in AI-related stocks.Concentration remains elevated with a small group of firms involved in AI-related technologies increasingly driving stock market performance in economies that are leading AI adoption or participating in its supply chain, the report said.Also Read | Will Tata Sons still have to go public? RBI’s revised Upper Layer NBFC rules explainedThe recent outperformance of some emerging markets has also been largely driven by AI-linked companies rather than broad-based strength. “Both remain sources of financial fragility as sell-offs in these firms could cause broader market declines in the US, and cause spillovers to other markets through wealth effects,” the central bank said.“As hyperscalers ramp up capital expenditure on AI buildout amid declining free cash flows, they have significantly increased debt issuances over the past two years to fund these investments,” it said.Debt financing is expected to rise significantly as spending expands further. “Thus, an AI-driven asset price correction could pose systemic risks through this channel, as banks may be indirectly exposed through their exposure to private credit firms and other key financing intermediaries funding the AI boom,” the RBI said.Also Read | RBI’s new fraud compensation mechanism: What’s different, who pays, how to claim compensationMeasures of equity valuations in the US across multiple metrics remained at the upper end of historical range. Meanwhile, the rest of the world’s exposure to US equity markets has grown markedly with gross foreign holdings of US equities rising to $21 trillion in March 2026 from $7.5 trillion in March 2020, according to the RBI.Story continues below this adThe South Korean stock market crashed 10% a week ago, triggering a circuit breaker that halted trading, as fears of the AI bubble bursting gained steam. Other Asian markets also fell, including the Indian market.South Korea’s Kospi index had more than doubled until the crash so far in 2026, raising concerns that the AI-led rally had become overstretched. Shares of SK Hynix and Samsung Electronics, which had tripled and quadrupled, respectively, this year and together account for nearly 55% of the benchmark index, fell more than 12% during the correction.While the AI rally has propelled the Kospi to multiple record highs this year, some experts believe valuations have run well ahead of fundamentals and that the recent correction could be an early sign of the AI-driven rally beginning to unwind.George Mathew is an Associate Editor with The Indian Express, based in Mumbai. A veteran of financial journalism with nearly three decades of experience, he is one of the country’s most authoritative voices on banking, regulation, and the corporate sector. Expertise & Focus Areas Mathew’s reporting covers the nerve center of India’s economy. His specialized beats include: The Reserve Bank of India (RBI): He has tracked the central bank's policy evolution through the tenures of multiple Governors, offering deep insights into monetary policy, repo rates, and banking regulation. Banking & Insurance: Extensive coverage of public and private sector banks, non-performing assets (NPAs), and key legislative reforms like the Insurance Amendment Bills. Corporate Affairs: Mathew frequently breaks major stories related to India's largest conglomerates, with a specific focus on the Tata Group, documenting boardroom shifts and strategic decisions. Financial Markets: Reporting on the complexities of Foreign Portfolio Investors (FPIs), IPOs, and currency fluctuations. Authoritativeness & Insight With a career dating back to the late 1990s, Mathew possesses a rare institutional memory of India’s financial liberalization and market crises. His work is not limited to daily news; he frequently contributes to the "Explained" section, where he decodes complex financial legislations and market trends for a broader audience. His rigorous reporting has also been featured in scholarly platforms like the Economic and Political Weekly (EPW). Find all stories by George Mathew here ... Read More