India’s Stock Market Faces Headwinds as Geopolitical Tensions Rise
February saw a surprising resurgence in foreign investment into Indian equities, with Foreign Institutional Investors (FIIs) injecting Rs 22,615 crore into the market. However, this positive trend is now under threat as escalating tensions in the Middle East, specifically the conflict between Iran and Israel, trigger a “risk-off” sentiment among investors.
The Impact of the Iran-Israel Conflict
The recent escalation of conflict has prompted a reassessment of risk across global financial markets. Experts predict FIIs will likely adopt a cautious “wait-and-watch” approach before making further investments in emerging markets like India. This shift in sentiment was already visible on Friday, with a sharp sell-off across Indian equity indices.
Capital Flight and Shifting Investments
Analysts anticipate a potential outflow of capital from emerging markets as investors gravitate towards safer assets. Trading activity is increasingly favoring US securities, alongside a surge in demand for bullion – gold and silver – signaling a move away from riskier investments. The ongoing rally in US Treasuries, oil, gold, and silver is expected to continue.
India’s Vulnerabilities: Crude Oil and Inflation
The conflict’s impact on India could be particularly pronounced due to the nation’s heavy reliance on imported crude oil. Higher crude oil prices are expected to widen the current account deficit and potentially fuel domestic inflation, putting pressure on the Indian Rupee. Nachiketa Sawrikar, Fund Manager at Artha Bharat Global Multiplier Fund, highlighted this deeper impact, predicting an acceleration of foreign capital outflow.
Sectoral Shifts in FII Investment
While FIIs demonstrated a renewed interest in India during February, their investments weren’t uniform across all sectors. There was significant selling in IT stocks, attributed to concerns surrounding the Anthropic shock and ongoing weakness in the segment. Conversely, financial services and capital goods attracted substantial buying interest.
February Inflows Offset by January Exodus
February’s inflows of Rs 19,782 crore into secondary markets, and Rs 2,832 crore into the primary market, partially offset the substantial Rs 35,962 crore outflow experienced in January. Despite the February gains, FIIs remain net sellers in 2026, with a cumulative outflow of Rs 13,347 crore.
Historical Trends: A Bearish Outlook in 2025
The buying trends of FIIs in 2025 were inconsistent, ultimately resulting in a bearish overall trend. They withdrew a total of Rs 1,66,286 crore from Indian markets, influenced by trade deal delays and perceived premium valuations. December 2025 also saw significant selling, with FIIs offloading shares worth Rs 22,611 crore.
Market Reaction: Friday’s Sell-Off
Friday’s market performance reflected the growing anxiety, with FIIs selling shares worth Rs 7,536.36 crore. This triggered a widespread sell-off, causing the Nifty to fall by 1.25% to 25,178.65 and the Sensex to decline by 1.17% to 81,287.19. Auto, financials, and FMCG sectors were the biggest losers, while the IT sector saw limited buying activity.
Frequently Asked Questions
Q: What is an FII?
A: FII stands for Foreign Institutional Investor. These are entities that invest in the financial markets of a country that is not their own.
Q: What does a “risk-off” sentiment mean?
A: A “risk-off” sentiment indicates that investors are becoming more cautious and are moving their money into safer investments, like US Treasuries or gold.
Q: How does the Iran-Israel conflict affect the Indian stock market?
A: The conflict increases global uncertainty, potentially leading to capital outflows from emerging markets like India and impacting the value of the Rupee.
Q: What sectors are most vulnerable to these market conditions?
A: Sectors reliant on imported crude oil, like energy and transportation, are particularly vulnerable. IT stocks have also shown recent weakness.
Did you know? The Indian stock market experienced a significant outflow of funds in January 2026, highlighting the sensitivity to global events.
Pro Tip: Diversifying your investment portfolio across different asset classes can support mitigate risk during periods of geopolitical uncertainty.
Stay informed about market developments and consider consulting with a financial advisor to create informed investment decisions.
