Foreign capital leaves as risk appetite fades
India’s equity market is heading toward one of its most severe months on record for foreign selling, as the war tied to Iran unsettles energy trade and weakens confidence in the country’s near term outlook. Overseas portfolio investors have already withdrawn about 1.12 trillion rupees, or 12.1 billion dollars, from Indian stocks with only two sessions left in March. That pace would put this month ahead of the previous peak in October 2024, when outflows reached 940 billion rupees.
The move reflects a broader shift in how global investors are pricing India’s exposure to external shocks. A market long viewed as one of the stronger growth stories in Asia is now being judged against a harsher set of variables, including expensive crude, tighter supply routes, a softer currency and rising inflation pressure. Analysts say the conflict in the Middle East has become the main force behind this turn in sentiment.
Peeyush Mittal, portfolio manager at Matthews Asia, said the heavy foreign institutional investor selling in March is tied to the regional conflict. In his view, a longer disruption would deepen the damage to India’s growth profile. That assessment has gained traction because India relies heavily on imported energy and is therefore more exposed than many peers when oil and gas flows become unstable.
The closure of the Strait of Hormuz has added urgency to those concerns. As the world’s third largest oil importer and second largest consumer of liquefied petroleum gas, India faces a direct hit when shipping routes tighten and supply fears trigger panic buying. The result is a market environment in which foreign investors are reducing risk rather than waiting for clarity.
Business data points to a slower economy
Recent activity figures have added weight to the cautious view. HSBC’s flash Purchasing Managers Index for March showed that private sector growth in India slowed to its weakest level since October 2022. While international orders posted their strongest rise, that support was outweighed by softer domestic demand, suggesting that conditions inside the economy are becoming less supportive.
Companies surveyed linked the slowdown to the Middle East conflict, volatile market conditions and stronger inflationary pressure. That matters because it suggests the damage is no longer confined to investor psychology. Businesses are already reporting a more difficult operating backdrop, and cost inflation is now close to a four year high. For markets, that combination raises concern over margins, consumer demand and policy room.
Pankaj Murarka, chief executive and chief investment officer at Renaissance Investment Managers, warned that if crude remains in an 85 dollar to 95 dollar range after the war, India could face another 40 billion dollars to 50 billion dollars in outflows. He said that would amount to more than 1 percent of gross domestic product and could reduce economic growth to 6.5 percent from 7.2 percent. That would still leave India expanding, but at a materially slower pace than investors had been expecting.
Oil exposure puts pressure on policy makers
Economists say the country’s dependence on imported oil makes the current shock especially difficult to manage. Hanna Luchnikava-Schorsch, head of Asia Pacific economics at S and P Global Market Intelligence, said India is among the most vulnerable economies to higher crude prices because net oil imports equal about 3.5 percent of GDP. In her assessment, persistently high energy prices could keep the rupee under strain and place additional pressure on the external balance.
She also warned that a higher energy import bill, combined with a slowdown in remittances from the Middle East, could widen both the current account deficit and the fiscal deficit. Those pressures are appearing just as global markets adopt a stronger risk off stance, which can accelerate capital flight from economies perceived as more exposed.
New Delhi has already moved to reduce some of the strain on consumers. Finance Minister Nirmala Sitharaman said the government cut the special excise duty on petrol and diesel for domestic consumption by 10 rupees per litre. Petroleum and Natural Gas Minister Hardeep Singh Puri said the government would take a large hit to tax revenues to absorb losses suffered by oil companies. While those steps may soften the shock at home, they also increase the cost to the public finances.
Valuations alone may not bring investors back
The market fallout has been visible across asset classes. Over the last month, the Nifty 50 has fallen about 7.4 percent, while the rupee has dropped sharply against the dollar and reached new lows. Analysts say interventions by the Reserve Bank of India may help limit disorderly swings, but they are unlikely to reverse the trend while energy markets remain disrupted.
Saion Mukherjee, head of equity research at Nomura, said Indian stocks are closely linked to the direction of oil prices and therefore to developments in Middle East geopolitics. He noted that India’s one year forward earnings multiple of 17.5 times compares with 16.9 times at the start of the Russia Ukraine conflict in early 2022. That suggests valuations have become less stretched, but not necessarily cheap enough to overcome the macro risks now in focus.
Other strategists share that conclusion. Daniel Grosvenor, director of equity strategy at Oxford Economics, said the decline in valuations is still not persuasive enough to attract foreign investors in the near term, given geopolitical uncertainty and elevated global risk premia. Positioning data points the same way. Nomura’s review of Asia and Asia Pacific funds excluding Japan showed that 68 percent of managers were underweight India in February, up from 63 percent a month earlier. The brokerage described India as one of the largest underweight positions in the region, underscoring how quickly sentiment has deteriorated.
