Middle East conflict risk spills over! Indian stock market experiences the largest foreign capital outflow in history

Ask AI: How could the Middle East conflict trigger India’s capital outflow in a chain reaction—at a record high?

Caixin News Agency, March 27 (Edited by Niu Zhanlin) Because the Iran war disrupts the global supply of oil and gas, intensifies economic pressure, and raises concerns about slower growth, foreign investors are withdrawing large amounts from India’s stock market. The country is expected to post a record high net outflow in March—exceeding $12 billion.

With only two trading days left in the month, foreign portfolio investors (FPI) have already累计净卖出约11.2k亿卢比(约合12.1B美元)的印度股票. Based on data from depository NSDL, this scale is likely to surpass the 940 billion rupees record set in October 2024, becoming the largest single-month capital outflow in history.

Matthews Asia portfolio manager Peeyush Mittal said: “A large-scale outflow of foreign capital in March 2026 is closely linked to the Middle East conflict. If the conflict lasts longer, the negative impact on India’s economic growth will be even more significant.”

Growth concerns intensify

PMI data released by HSBC on Tuesday showed that in March, India’s private-sector activity fell to the lowest level since October 2022. The decline was driven by weakening domestic demand, which offset strong growth in international orders.

Companies interviewed pointed out that the main factors dragging growth are the Middle East conflict, market turbulence, and intensifying inflation pressure. As of now, cost inflation is approaching a four-year high.

As the world’s third-largest net crude oil importer and second-largest liquefied petroleum gas consumption country, India is facing soaring energy costs. Meanwhile, due to the closure of the Strait of Hormuz tightening supply conditions, the market has also seen panic stockpiling.

Pankaj Murarka said that if post-war oil prices remain in the $85 to $95 per barrel range, it could lead to an additional $40 billion to $50 billion in capital outflows, equivalent to more than 1% of India’s GDP. He expects this would pull India’s economic growth rate down from 7.2% to 6.5%.

Economists have substantially raised their inflation forecasts, lowered their growth expectations, and incorporated the trend of rupee depreciation into their baseline. Krishna Bhimavarapu, an Asia-Pacific economist at State Street Investment Management, said: “An escalation in the Middle East situation puts energy risk back at the center of India’s macro outlook. Oil prices, the rupee, and the current account are now tightly interwoven in investors’ thinking.”

India is extremely sensitive to high oil prices

Hanna Luchnikava-Schorsch, a global economist at S&P Global, said India is “one of the countries most vulnerable to high oil price shocks.” The country’s crude oil demand relies on imports by roughly 85% to 90%, making it especially fragile to oil price increases. She added that if oil prices stay elevated for an extended period, the rupee may face sustained downward pressure.

In a post Friday, India’s Finance Minister Nirmala Sitharaman said the government has cut the special excise duty on domestic gasoline and diesel by 10 rupees per liter to prevent retail prices from rising due to the Iran war disrupting global energy supply.

She added that over the past month, international crude oil prices surged from around $70 per barrel to about $122 per barrel. The government decided to absorb the cost of the higher energy prices to keep retail fuel prices stable, and added that these tax cuts will help reduce losses faced by oil companies.

India’s Minister of Petroleum and Natural Gas, Hardeep Singh Puri, said that to make up for losses by oil companies, government tax revenue will take a “massive hit.”

At the same time, with rising energy import spending and slower remittances from the Middle East, the country is expected to widen India’s current account deficit and fiscal deficit. Against a backdrop of rising global risk-aversion sentiment and growing investor concerns about India’s growth prospects, capital outflows may accelerate further.

Over the past month, India’s benchmark equity index Nifty 50 has fallen about 7.4%, while the rupee has significantly depreciated against the US dollar and hit a new low.

Although the Reserve Bank of India has intervened in the FX market multiple times, analysts believe that as long as the energy market remains turbulent, the rupee will continue to face pressure, which will further prompt foreign capital to leave India.

Saion Mukherjee, head of equity research at Nomura Securities, said: “India’s stock market performance is highly correlated with oil prices, and oil prices depend on Middle East geopolitical dynamics.”

Daniel Grosvenor, an analyst at Oxford Economics, said: “We believe that the decline in current valuations is still not enough to attract foreign investors back in the short term.”

Nomura Securities’ data show that in February 2026, among Asia (excluding Japan) fund allocations, the share of funds reducing exposure to India had risen to 68%, higher than 63% in the prior month. In a report on March 23, the firm listed India as one of the “most underweighted markets.”

(Caixin News Agency, Niu Zhanlin)