Affected by the Middle East conflict, foreign investors sold over $12 billion worth of Indian stocks in a month, setting a record.

Iranian tensions have disrupted oil and natural gas supplies, weighing on India’s economy and intensifying concerns about slower economic growth. In March, foreign investors are expected to pull out a record $12.0 billion from India’s stock market.

This month leaves only two trading days, and foreign investors have already withdrawn ¥1.12 trillion rupees (about $12.1 billion) from India’s stock market. According to data from the depository NSDL, this is likely to mark the worst single-month selloff on record, surpassing the previous record of ¥940 billion set in October 2024.

“Large outflows of funds from March 2026 foreign institutional investors (FIIs) are linked to the conflict in the Middle East,” said Peeyush Mittal, portfolio manager at Matthews Asia. “The longer the conflict lasts, the deeper the negative impact on India’s economic growth.”

Growth concerns

The initial reading of the Purchasing Managers’ Index (PMI) released by HSBC on Tuesday showed that India’s private-sector activity slowed in March to the lowest level since October 2022, as soft domestic demand offset the strong growth in new international orders.

Firms surveyed pointed out that the Middle East conflict, market instability, and steadily worsening inflation pressures are factors constraining growth. Cost inflation is currently approaching the highest level in four years.

As the world’s third-largest oil importer and the second-largest liquefied petroleum gas (LPG) consumer, India is struggling to deal with rising energy costs and panic buying triggered by supply shortages caused by the closure of the Strait of Hormuz.

Pankaj Murarka, CEO and chief investment officer of Renaissance Investment Management, said in an interview Friday that if post-war oil prices stabilize at $85 to $95 per barrel, it could lead to fund outflows of $40 billion to $50 billion—equivalent to more than 1% of India’s GDP.

He said this could bring India’s economic growth rate down from 7.2% to 6.5%.

Hanna Luchnikova-Shorls, Asia-Pacific economic lead at S&P Global Market Intelligence, said that India is “one of the countries most vulnerable to rising oil prices,” because its net oil import bill is 3.5% of GDP. She added that “persistently higher oil prices” could keep the rupee under pressure.

India’s finance minister Nirmala Sitharaman posted on the X website on Friday, saying that the country has cut the special consumption tax on gasoline and diesel for domestic consumption by 10 rupees per liter each.

Hardeep Singh Puri, India’s minister of petroleum and natural gas, wrote on X on Friday, saying the government will suffer a “significant” tax revenue loss as it seeks to make up for losses incurred by oil companies.

Shorls said that she expects higher Indian energy spending and slower remittances from the Middle East to widen India’s current account deficit and fiscal deficit. She warned that “capital outflows may intensify due to global risk-avoidance sentiment and investors’ concerns about India’s economic growth.”

Weak rupee, rising risk-avoidance sentiment

Over the past month, India’s benchmark equity index Nifty 50 has fallen by about 7.4%, while the rupee against the U.S. dollar has weakened sharply and hit new lows. Despite regular intervention by the Reserve Bank of India, experts say the rupee may still face pressure due to ongoing turbulence in energy markets.

In an email, Sayon Mukherjee, head of equity research at Nomura Securities, said: “India’s stock market performance is closely tied to oil prices, and oil prices depend on the Middle East geopolitical situation.” He noted that India’s expected price-to-earnings ratio for the coming year is 17.5 times, performing well compared with 16.9 times when the Russia-Ukraine conflict broke out in early 2022.

However, analysts warn that attractive valuations alone may not be enough to lure foreign investors back into the Indian market quickly. The increasingly adverse impact of the Middle East conflict on the economy and the weakening of the rupee remain key obstacles.

Daniel Grovner, head of equity strategy at Oxford Economics, said: “We believe that the magnitude of valuation declines is not sufficient to attract foreign investors in the short term.” He noted that this is due to factors including geopolitical uncertainty and elevated global risk premiums.

Asset allocation data for funds in Asia and the Asia-Pacific region compiled by Nomura for February (excluding Japan) shows that more funds reduced their holdings of India—68% of funds cut exposure, higher than 63% the previous month.

In a report dated March 23, the brokerage said that India is “one of the countries with the highest proportion of reduced holdings.”

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