India Stock Selloff: Iran War Fears Trigger Record $12B Foreign Investor Outflow

Foreign investors are pulling capital from Indian equities at a record pace, driven by concerns over the escalating conflict in the Middle East and its potential impact on India’s economic growth. With just two trading days remaining in March 2026, outflows have already reached $12.1 billion (1.12 trillion rupees), surpassing the previous record of $940 billion in October 2024, according to data from depository firm NSDL.

The primary driver behind this sell-off is the disruption to oil and gas supplies caused by the Middle East conflict. As the world’s third-largest oil importer and second-largest liquefied petroleum gas consumer, India is particularly vulnerable to rising energy costs. The closure of the Strait of Hormuz is exacerbating these concerns, leading to panic-buying and tightening supplies.

Renaissance Investment Managers CEO and Chief Investment Officer Pankaj Murarka estimates that if oil settles between $85 and $95 a barrel, India could notice incremental outflows of $40 billion to $50 billion – exceeding 1% of the nation’s GDP. This could potentially reduce India’s economic growth from 7.2% to 6.5%.

The Indian rupee has also weakened considerably, adding to investor concerns. Over the past month, the Nifty 50 benchmark has fallen approximately 7.4%, while the rupee has hit new lows against the dollar. Despite interventions by the Reserve Bank of India, the currency remains under pressure due to ongoing disruptions in energy markets.

Nomura’s head of equity research, Saion Mukherjee, notes that India’s one-year forward earnings multiple of 17.5 times is favorable compared to the 16.9 times recorded at the start of the Russia-Ukraine conflict in early 2022. However, attractive valuations alone aren’t enough to entice foreign investors back in the current climate.

The Indian government has taken steps to mitigate the impact of rising fuel prices, reducing the special excise on petrol and diesel by 10 rupees per litre each. Hardeep Singh Puri, India’s minister for petroleum and natural gas, stated the government will absorb significant losses in taxation revenue to support oil companies.

S&P Global Market Intelligence’s head of Asia-Pacific Economics, Hanna Luchnikava-Schorsch, highlights that India is “one of the most vulnerable [countries] to higher oil prices,” with net oil imports accounting for 3.5% of its GDP. Sustained higher oil prices could further pressure the rupee and widen India’s current and fiscal deficits.

Data from Nomura reveals a growing number of Asia and APAC funds are now underweight on India – 68% in February, up from 63% the previous month. India is described as “one of the biggest” underweights by the global brokerage.

Daniel Grosvenor, director of equity strategy at Oxford Economics, believes that geopolitical uncertainty and elevated global risk premia will continue to deter foreign investment in the near term. He suggests that attractive valuations are not enough to overcome these headwinds.

What is driving the foreign investor outflows from India?

The primary driver is the conflict in the Middle East and its impact on oil and gas supplies, leading to concerns about India’s economic growth.

How is the rising oil price affecting India?

Rising oil prices are increasing India’s energy bill, potentially widening its current and fiscal deficits, and putting pressure on the rupee.

What is the Indian government doing to address the situation?

The government has reduced excise duties on petrol and diesel and is prepared to absorb losses in taxation revenue to support oil companies.

Is now a good time to invest in Indian equities?

Analysts suggest that while valuations are attractive, geopolitical uncertainty and global risk premia are likely to continue deterring foreign investment in the near term.

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