FPIs had turned net buyers in February after India’s trade agreement with the European Union (EU) and the US’ decision to lower tariffs on Indian goods to 18 per cent from 50 per cent. However, renewed geopolitical tensions and a spike in crude oil prices have reversed sentiment. On Monday alone, FPIs were net sellers to the tune of ₹9,366 crore.
The selling has not been limited to India. South Korea and Taiwan have also seen month-to-date outflows of $9.5 billion and $15.8 billion, respectively, amid rising global risk aversion.
The war involving Iran, the US and Israel has now entered its third week, and shows little sign of de-escalation, triggering one of the most significant disruptions to global oil supplies in recent years. Iran has reportedly attacked and blocked crude tankers in West Asia, and restricted movement through the Strait of Hormuz, a key artery for global oil and gas shipments.
Since the start of the conflict, the Sensex has declined 7.1 per cent and the Nifty 7 per cent. From their all-time highs, the Sensex is down 12 per cent and the Nifty 11.1 per cent. A fall of 10 per cent from recent peaks is typically defined as a market “correction”, a technical indicator signalling a phase of weakness.
The total market capitalisation of BSE-listed companies has declined by about ₹33 trillion during this period, and now stands at ₹430.6 trillion. The rupee has weakened 1.6 per cent to 92.43 against the dollar since the conflict began, which has eaten into the returns of overseas funds.
Brent crude has surged 36 per cent to $100.4 per barrel on Monday, which has emerged as a key pain-point for Indian equities.
Higher oil prices are negative for India, a major oil importer, as they can widen the fiscal deficit, stoke inflation, and weigh on economic growth.
The Strait of Hormuz accounts for about 43 per cent of India’s oil imports, and 63 per cent of its liquefied natural gas (LNG) imports. Any disruption to supplies could also impact industrial production, as most manufacturing industries are linked to the oil and gas supply chain.
“FPIs will continue to be net sellers as long as this conflict persists and oil prices remain elevated. Global macro conditions must improve and oil prices must stabilise for any meaningful change in FPI sentiment. With the possibility of more countries being drawn into the conflict and calls from US President Donald Trump for other nations to help protect the Strait of Hormuz, uncertainty remains high,” said U R Bhat, cofounder of Alphaniti Fintech.
“Oil prices are a key factor for investment flows into India. When global risk levels rise, investors typically reduce exposure to emerging markets. Disruption from artificial intelligence (AI) had already been weighing on information technology (IT) stocks, and the war has added another layer of uncertainty,” he added.
However, some analysts believe the Indian markets could recover once geopolitical tensions ease.
“India is facing external headwinds at the moment, and the rupee could weaken further while inflation may rise. However, this does not alter India’s long-term structural investment story, given its strong demographics and potential to benefit from the broader shift in global manufacturing,” said Joanne Goh, senior investment strategist at DBS Bank.
 "Foreign portfolio investors, FPIs")