Foreign investors are set to pull a record $12 billion from Indian stocks this March, largely due to disruptions in oil and gas supplies caused by the war in Iran. This situation is straining the economy and raising concerns about slower growth.
With only two business days remaining in the month, international portfolio investors have already withdrawn around ₹1.12 trillion ($12.1 billion), marking what might become the worst monthly decline, surpassing the prior record of ₹940 billion noted in October 2024, based on data from NSDL.
“The significant withdrawals in March 2026 are linked to the conflict in the Middle East,” remarked Piyush Mittal, a portfolio manager at Matthews Asia. He indicated that if the conflict persists, it could increasingly hinder India’s economic growth.
Anxiety about growth
India’s Private Sector Activity Index, released by HSBC on Tuesday, indicated a decrease in activity in March, reaching the lowest point since October 2022, driven by weakening domestic demand, despite a boost in international orders.
Respondents pointed to the conflicts in the Middle East, market volatility, and rising inflationary pressures as significant challenges. Currently, cost inflation is approaching a four-year peak.
As the world’s third-largest oil importer and second-largest consumer of liquefied petroleum gas, India is confronting escalating energy costs and panic buying, exacerbated by the tight supply situation from the oil crisis.
Pankaj Murarka, CEO of Renaissance Investment Managers, mentioned in a CNBC segment that if oil prices settle between $85 to $95 per barrel post-conflict, outflows could escalate to between $40 billion to $50 billion, affecting over 1% of India’s GDP. This scenario could potentially lower the country’s growth rate from 7.2% to 6.5%.
With net oil imports making up 3.5% of GDP, India stands as “one of the most vulnerable countries,” warned Hanna Ručnikava Schorsch, from S&P Global Market Intelligence. She noted that persistent increases in oil prices could further weaken the rupee.
In response, Finance Minister Nirmal Sitharaman announced a reduction in special consumption tax on gasoline and diesel. Hardeep Singh Puri, India’s Oil and Natural Gas Minister, noted on X that the government’s measures might result in a ‘big hit’ to tax revenue to support oil companies impacted by the crisis.
Ručnikava-Schorsch cautioned that rising energy bills and a drop in remittances from the Middle East are likely to widen India’s current account and fiscal deficits. Furthermore, capital outflows could increase as global ‘risk-off’ sentiment and worries about India’s economic prospects grow.
Rupee weakness combines with ‘risk-off’ sentiment
In the past month, the Nifty 50 index has declined by about 7.4%. The rupee has also sharply depreciated, reaching a new low against the dollar, despite ongoing efforts by the Reserve Bank of India to stabilize it. Many experts believe the currency will remain under pressure.
Despite the attractive valuations, analysts caution that these alone might not quickly entice foreign investors back. The economic ramifications of ongoing Middle East tensions and a weak rupee continue to serve as significant obstacles.
“We don’t think lower valuations will be enough to draw international investors back in the near term,” noted Daniel Grosvenor from Oxford Economics, highlighting the ongoing geopolitical uncertainties and growing global risk perceptions.
Recent allocation data from Nomura shows a growing underweight position on India, with 68% of funds reporting this stance, compared to 63% in the previous month. They labeled India as their “largest” area of underweight in a report earlier this month.
