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

Due to the disruptions in oil and gas supplies caused by the Iran conflict, India’s economy is under pressure, heightening concerns about a slowdown in economic growth. Foreign investors are expected to withdraw a record $12 billion from the Indian stock market in March.

With only two trading days left in the month, foreign investors have pulled out 1.12 trillion rupees (approximately $12.1 billion) from the Indian stock market. According to data from the depository institution NSDL, this is likely to set a record for the worst monthly sell-off in history, surpassing the previous record of 940 billion rupees set in October 2024.

“The massive outflow of foreign institutional investors (FII) funds in March 2026 is related 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 preliminary purchasing managers’ index (PMI) released by HSBC on Tuesday showed that India’s private sector activity slowed to its lowest level since October 2022 in March, as weak domestic demand offset strong international orders.

Surveyed companies pointed out that the Middle East conflict, market instability, and rising inflation pressures are constraining growth. Cost inflation is currently near its highest level in four years.

As the world’s third-largest oil importer and the second-largest liquefied petroleum gas consumer, India is struggling to cope with rising energy costs and panic buying triggered by supply tightness due to the closure of the Strait of Hormuz.

Pankaj Murarka, CEO and Chief Investment Officer of Renaissance Investment Management, stated in an interview on Friday that if post-war oil prices stabilize between $85 and $95 per barrel, it could lead to an outflow of $40 billion to $50 billion—equivalent to over 1% of India’s GDP.

He noted that this could reduce India’s economic growth rate from 7.2% to 6.5%.

Hanna Luchnikava-Sholsh, Head of Economic Intelligence for Asia-Pacific at S&P Global Market Intelligence, stated that India is “one of the countries most vulnerable to rising oil prices,” as its net oil imports account for 3.5% of GDP. She added that “persistently rising oil prices” could continue to pressure the rupee.

India’s Finance Minister Nirmala Sitharaman posted on X on Friday that the country has reduced the special excise duty on gasoline and diesel for domestic consumption by 10 rupees per liter.

India’s Minister of Petroleum and Natural Gas Hardeep Singh Puri stated on X on Friday that the government will suffer “huge” tax losses due to compensating oil companies for their losses.

Sholsh indicated that increased energy expenditure in India and a slowdown in remittances from the Middle East are expected to widen India’s current account deficit and fiscal deficit. She warned that “capital outflows may intensify due to global risk aversion and investors’ concerns about India’s economic growth.”

Weak Rupee, Rising Risk Aversion

In the past month, India’s benchmark Nifty 50 index has fallen by about 7.4%, while the rupee has significantly weakened against the dollar, hitting new lows. Despite regular interventions by the Reserve Bank of India, experts say the rupee may still face pressure due to ongoing turmoil in energy markets.

Saiyan Mukherjee, Head of Equity Research at Nomura Securities, stated in an email: “The performance of the Indian stock market is closely related to oil prices, which depend on geopolitical situations in the Middle East.” He noted that India’s expected price-to-earnings ratio for the coming year is 17.5 times, which is a good performance compared to 16.9 times when the Russia-Ukraine conflict erupted in early 2022.

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

Daniel Grosvenor, Director of Equity Strategy at Oxford Economics, stated: “We believe that the decline in valuations is insufficient to attract foreign investors in the short term.” He pointed out that geopolitical uncertainty and high global risk premiums are the reasons for this phenomenon.

Data compiled by Nomura Securities on asset allocation for February across Asian and Asia-Pacific funds (excluding Japan) showed that more funds have reduced their holdings in India—68% of funds reduced their holdings, up from 63% last month.

The brokerage firm stated in a report on March 23 that India is “one of the countries with the highest reduction ratio.”