Foreign investors rethink India bet: BNP Paribas flags 4 risks for markets

FIIs have turned cautious on Indian equities, selling ₹1.07 trillion amid Iran war risks. BNP Paribas flags oil, inflation, CAD and earnings concerns.

Foreign institutional investors (FIIs) have turned cautious on Indian equities once again, reversing the tentative optimism seen just a month ago, as rising geopolitical tensions in West Asia and a sharp spike in oil prices cloud the macro outlook. 

According to a recent BNP Paribas report, 2026 had begun on a relatively strong footing for India, supported by improving macro indicators, policy momentum and expectations of stronger consumption. This had even led to a brief return of foreign flows, with FIIs turning net buyers in February to the tune of ₹22,615 crore. 

However, that optimism has quickly faded. "FII flows have turned negative in March 2026 till date and the outlook has worsened," the brokerage noted, highlighting a sharp shift in sentiment following the escalation of the Iran conflict and its spillover effects. 

 

Data from the report shows that FIIs have turned aggressive sellers since the war, offloading around ₹1.07 trillion of Indian equities since late February. This marks a significant reversal in positioning, especially after global investors had begun warming up to India’s growth story earlier in the year.

  "In our investor meetings in February 2026, we saw investors turning slightly more receptive about Indian equities after the recent positive developments. Investors largely agreed on the improving macro and earnings outlook, but the main pushback was on a lack of compelling narrative or immediate reasons to buy," BNP Paribas noted. 

The Middle East conflict and India’s high dependence on oil imports, however, have likely dented foreign investors’ sentiment, it said.  READ | Will FII selling persist in FY27? Analysts see modest flows returning in H2

BNP Paribas pointed to four key concerns that are making foreign investors wary.

First, India's external position is vulnerable to a sustained rise in oil prices. As a large importer of crude, any spike in energy costs widens the current account deficit and puts pressure on the rupee. The report estimates that a 10 per cent rise in oil prices could increase the current account deficit by around 35 basis points. 

Second, remittances could come under strain if the conflict persists. The Middle East accounts for roughly 40 per cent share of India’s inward remittances, and any slowdown in the region's economies could impact income flows and domestic consumption.  "A prolonged conflict can slow down the economies in the Middle East, impacting jobs and projects," the report noted. 

Third, inflation risks are back on the radar. Higher crude prices tend to feed into broader price pressures, and BNP Paribas cautioned that a 10 per cent increase in oil could push inflation higher by about 30 basis points, assuming full pass-through. This comes at a time when fiscal space is already limited, reducing the government's ability to cushion the impact. 

Finally, corporate earnings face downside risks. Rising input and transportation costs, along with weaker global demand, could weigh on profitability across sectors. Industries such as aviation, autos, infrastructure and oil-linked businesses are seen as particularly exposed.  READ | From crude to currency: Key triggers that could influence markets in FY27 

Beyond these macro pressures, the report also flagged a broader shift in global investor behaviour. The escalation of the Iran conflict has led to a risk-off sentiment across emerging markets, with capital rotating towards commodity exporters, such as Brazil, instead. 

"India saw lower outflows vs Asian peers like Taiwan and Korea. Investors increased positioning in commodity winners like Brazil," the report said. 

Back home, BNP Paribas noted that domestic SIP flows remained resilient amid the market consolidation, though persistent weak returns could test investor patience. Resolution of the Middle East conflict and a moderation in O&G (oil and gas) prices will be key for sustained equity inflows, it added.