India's foreign exchange restrictions have significantly increased hedging costs for overseas investors, making Indian bonds less attractive. According to The Economic Times, one-year hedging costs in the onshore market have risen by about 30 basis points since the measures were introduced. The increase has been steeper offshore, with NDF hedging costs climbing nearly 70 basis points. In the immediate aftermath of the RBI's move, NDF hedging costs hit their highest level in more than 12 years. The Reserve Bank of India's measures to steady the rupee, including curbs aimed at limiting arbitrage trades, have eased pressure on the currency but at the cost of higher hedging expenses for foreign bond investors in both onshore over-the-counter and offshore non-deliverable forward markets.
Foreign investors have sold ₹211 billion ($2.26 billion) of Indian government debt since the war began on February 28, with sales accelerating after the FX curbs were announced, according to data from the clearing house. As reported by The Economic Times, the RBI's measures have further darkened sentiment toward India at a time when surging oil prices following the outbreak of the Iran war were already weighing on the economic outlook. India imports roughly 90% of its oil needs and remains heavily dependent on supplies from the Middle East, making the country particularly vulnerable to oil price volatility.
Higher oil prices are amplifying concerns among equity investors, who have sold about $38 billion of Indian shares since the start of 2025. According to The Economic Times, foreign outflows from equities totalled a record $12.7 billion in March alone. The Iran war has intensified concerns that were already building, said Angela Lan, senior strategist of investment strategy and research at State Street Investment Management. "Even before the conflict, India was facing headwinds from elevated valuations, AI-led disruption risks and softening earnings momentum," Lan said. Brokerages have begun cutting earnings forecasts, with expectations that downgrades will broaden over coming quarters.
Goldman Sachs has lowered its earnings growth forecast for India by a cumulative 9 percentage points over the next two years. As reported by The Economic Times, Nomura has warned of a 10-15% downside risk to consensus earnings estimates for the current financial year if oil prices remain at current levels, and has cut its December 2026 target for the Nifty 50 index by 15% to 24,600. The index has fallen more than 7% so far this year. "Even if the conflict is resolved within weeks, we would still expect foreign investors to remain largely in risk-off mode in the near term," said Rita Tahilramani of Aberdeen Investments. Aberdeen said that most of its Asia and EM equities portfolios are currently underweight Indian equities, while remaining constructive on long-term prospects.
