Foreign portfolio investors have withdrawn ₹2.28 trillion from Indian equities through May 11, 2025, according to depository and exchange data. This figure represents just ₹120 billion short of the record ₹2.4 trillion secondary market outflows recorded in the entire 2025, as reported by Mint. The current outflows have been concentrated in the recent period, with ₹1.85 trillion - over four-fifths of total outflows - occurring between March and May 11 alone, demonstrating the accelerated pace of foreign selling since the geopolitical crisis began. However, the selling has intensified further in 2026, with FPIs pulling over ₹2 lakh crore from Indian equities year-to-date as of May 10, 2026, far exceeding the ₹1.66 lakh crore withdrawn in all of 2025, as reported by The Economic Times.
The Indian rupee has depreciated 4.75% to 95.31 against the dollar since February 28, with currency experts warning that three critical triggers could push the rupee to 100/$ by year-end. The West Asia war, which began on February 28, has driven crude oil prices 44% higher to $104 per barrel as of May 11, with Brent crude climbing past $100 a barrel and trading around $104-$105 by May 11, 2026, according to The Economic Times. With India importing approximately 90% of its daily crude requirement of 5.5 million barrels, the oil shock threatens to widen the current account deficit. The ongoing conflicts and doubts over a US-Iran ceasefire are prolonging uncertainty over the Strait of Hormuz, with the Strait impacting 10% of the roughly 104 million barrels of global supply daily. Nippon India's CIO Shailesh Raj Bhan warned that if oil prices reach $125 a barrel, it could trigger a significant market drop and lead investors to sell, as reported by The Economic Times.
According to Sanjeev Prasad, MD and co-head of Kotak Institutional Equities, if oil remains above $100 per barrel beyond mid-May against their base case of $85 for FY27, India's current account deficit could widen to 2.6% of GDP from an estimated 2% if the conflict ends this month, as reported by Mint. Prolonged high oil prices could also compel the central bank to tighten rates amid inflation concerns, pressuring corporate earnings that have been resilient so far. The Nifty 50's Price-to-Earnings (P/E) ratio is about 21.00, which is below its 10-year average, but there's little room for error if oil prices climb to $125 a barrel, which could cause panic selling. The ongoing conflict in West Asia and possible disruptions at the Strait of Hormuz pose significant risks that could hurt investor sentiment and increase FPI selling, as reported by The Economic Times.
The macro risks combined with relatively higher valuations compared with peers such as Taiwan and South Korea have accelerated FPI outflows, according to Mint reports. As a result, MSCI India has delivered a negative return of 10.58% this calendar year through April, compared with a 21.28% gain for MSCI Emerging Markets. Since the start of the war, the market has declined 5.4% to 23,815.85 on Monday, reflecting the immediate impact of geopolitical tensions on investor sentiment. The Nifty 50 index fell 1.3% on May 11, 2026, largely due to oil price movements, contributing to a cautious market sentiment. Despite the overall selling, FPIs are selectively investing in sectors such as power, construction, and capital goods, and showing increasing preference for mid-cap and select small-cap stocks with strong fundamentals and growth potential. However, the Indian market has recently underperformed some emerging market peers like Korea, partly because it is less appealing to foreign capital.
Not all market veterans share the bearish sentiment, with Jyoti Jaipuria, founder of Valentis Advisors, stating that "we've seen the worst of the fighting" and expressing cautious optimism that the Strait of Hormuz would open even if fighting continues, as reported by Mint. Nippon India's CIO Shailesh Raj Bhan believes foreign investor selling has corrected Indian stock valuations, making them more attractive, and recommends this period as a good time to buy quality companies for long-term gains, suggesting investors even advance their Systematic Investment Plans (SIPs) for potentially better returns. The fund house typically holds less than 5% cash in its schemes, focusing on selecting stocks based on fundamentals to outperform benchmarks rather than trying to time the market. However, even with attractive valuations, the risks from geopolitical tensions and high crude oil prices present a strong case for caution. The growing dominance of DIIs over FPIs suggests the Indian market may increasingly move on domestic sentiment rather than foreign capital flows, with India potentially losing its share of emerging market investments due to current global risk perceptions.
