Foreign investors are on track to pull a record $12 billion from Indian equities this March as the Iran war disrupts oil and gas supplies, squeezing the economy and stoking fears of a growth slowdown.<\/p>\n\n\n\n
With just two trading days left in the month, foreign portfolio investors have already pulled out 1.12 trillion rupees ($12.1 billion) \u2014 likely marking the worst monthly selloff, surpassing the previous record of 940 billion rupees in October 2024, according to data from depository firm NSDL.<\/p>\n\n\n\n
\u201cLarge FII outflows in March 2026 are linked to the conflict in the Middle East,\u201d said Peeyush Mittal, portfolio manager at Matthews Asia \u2014 FII refers to foreign institutional investors. \u201cThe longer the conflict persists, the deeper the negative impact on India\u2019s economic growth,\u201d he added in an email to CNBC.<\/p>\n\n\n\n
Growth worries<\/p>\n\n\n\n
HSBC<\/p>\n\n\n\n
\u2019s flash Purchasing Managers\u2019 Index released Tuesday showed India\u2019s private\u2011sector activity in March slowing to its weakest level since October 2022, as softer domestic demand outweighed the strongest rise in international orders.<\/p>\n\n\n\n
Companies surveyed cited the Middle East conflict, unstable market conditions, and intensifying inflationary pressures as factors weighing on growth. Cost inflation is now near a four\u2011year high.<\/p>\n\n\n\n
As the world\u2019s third\u2011largest oil importer and second\u2011largest liquefied petroleum gas consumer, India is grappling with rising energy costs and panic\u2011buying amid tightening supplies due to the closure of the Strait of Hormuz.<\/p>\n\n\n\n
If oil settles at $85-$95 a barrel after the war, that could lead to incremental outflows of $40 billion to $50 billion \u2014 more than 1% of India\u2019s GDP \u2014 according to Renaissance Investment Managers CEO and Chief Investment Officer Pankaj Murarka, speaking to CNBC\u2019s \u201cInside India\u201d on Friday.<\/p>\n\n\n\n
This could trim India\u2019s economic growth to 6.5% from from 7.2%, he said.<\/p>\n\n\n\n
India is \u201cone of the most vulnerable [countries] to higher oil prices\u201d as its net oil imports amount to 3.5% of GDP, said Hanna Luchnikava-Schorsch, head of Asia-Pacific Economics at S&P Global Market Intelligence. She added that \u201csustained higher oil prices\u201d could keep the rupee under pressure, in an email to CNBC.<\/p>\n\n\n\n
India\u2019s finance minister Nirmal Sitharaman said the country has cut the special excise on petrol and diesel for domestic consumption by 10 rupees per litre each, in a post on X on Friday.<\/p>\n\n\n\n
Hardeep Singh Puri, India\u2019s minister for petroleum and natural gas, in a Friday post on X said that the government will take \u201chuge hit\u201d on taxation revenues to fund the losses faced by oil companies.<\/p>\n\n\n\n
An increase in India\u2019s energy bill and slowdown in remittances from the Middle East are projected to widen India\u2019s current account deficits and fiscal deficit, Luchnikava-Schorsch said, warning that \u201ccapital outflows are likely to intensify due to global \u201crisk-off\u2019 sentiment and investors\u2019 concerns over India\u2019s economic growth.<\/p>\n\n\n\n
Weak rupee meets \u2018risk-off\u2019 sentiment<\/p>\n\n\n\n
Over the past month, the benchmark Nifty 50<\/p>\n\n\n\n
has fallen about 7.4%, while the rupee has weakened sharply<\/p>\n\n\n\n
against the dollar, touching new lows. Despite regular interventions by the Reserve Bank of India, experts said that the currency is likely to remain under pressure as energy markets remain disrupted.<\/p>\n\n\n\n
\u201cThe Indian equity market\u2019s performance is tied to oil prices, which depend on Middle East geopolitics,\u201d said Saion\u202fMukherjee, head of equity research at Nomura, in an email to CNBC. He noted that India\u2019s one\u2011year forward earnings multiple of 17.5 times compares well with the 16.9 times recorded at the onset of the Russia\u2011Ukraine conflict in early 2022.<\/p>\n\n\n\n
Still, analysts warn that attractive valuations alone may not lure foreign investors back soon. The deepening impact of the Middle East conflict on the economy and a weaker rupee remain significant headwinds.<\/p>\n\n\n\n
\u201cWe don\u2019t think the decline in valuations is compelling enough to draw foreign investors in the near term,\u201d said Daniel\u202fGrosvenor, director of equity strategy at Oxford Economics, citing geopolitical uncertainty and elevated global risk premia in an email to CNBC.<\/p>\n\n\n\n
The allocations data for Asia and APAC funds (excluding Japan) in February, compiled by Nomura, showed that more funds have turned underweight on India \u2014 68% as compared to 63% in the prior month.<\/p>\n\n\n\n
The global brokerage described India as \u201cone of the biggest\u201d underweights, in a March 23 report.<\/p>\n\n\n\n