Since the start of the West Asia war and the sharp 44% rise in crude oil prices, foreign portfolio investors (FPIs) have been steadily selling Indian shares, pushing total outflows in less than five months close to last year’s record level.
FPIs have sold cash shares worth ₹2.28 trillion in calendar 2026 through 11 May — just ₹120 billion short of the record ₹2.4 trillion secondary market outflows seen in the whole of 2025, according to depository and exchange data.
Of this, ₹1.85 trillion — over four-fifths of total outflows — came between March and 11 May alone, underscoring investor concerns about the impact of elevated crude on India’s macroeconomic fundamentals and corporate earnings if the war drags on.
Crude concerns
Recognizing the economic threat from sustained high oil prices, Prime Minister Narendra Modi reiterated an appeal to citizens to conserve fuel and curb gold purchases on Monday.
The West Asia war, which began on 28 February, has lifted crude 44% to $104 a barrel as of 11 May.
With India importing around 90% of its daily crude requirement of 5.5 million barrels, the oil shock threatens to widen the current account deficit.
The pressure is visible in the currency markets. Since 28 February, the rupee has depreciated 4.75% to 95.31 against the dollar as of Monday.
Strait chokepoint
"With the Strait of Hormuz chokehold impacting 10% of the roughly 104 million barrels of global supply daily, crude is being bid for at higher prices on the high seas than what we see on the trading terminals," Sanjeev Prasad, MD and co-head of Kotak Institutional Equities (KIE), told Mint in an earlier interaction.
If oil remains above $100 a barrel beyond mid-May, against KIE’s 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, according to KIE.
Prolonged high oil prices could also compel the central bank to tighten rates amid inflation concerns, pressuring corporate earnings, which have been resilient so far, Prasad said.
Macro risks combined with relatively higher valuations compared with peers such as Taiwan and South Korea have accelerated FPI outflows.
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, according to index provider MSCI.
Cautious optimism
Not all market veterans are alarmed.
"We've seen the worst of the fighting and I am sanguine that the Strait would open even if the fighting continues, "said Jyoti Jaipuria, founder, Valentis Advisors, drawing a parallel with the Ukraine war where fighting was most intense at the start of the over four year conflict only to ebb later.
Beyond cash selling, FPIs have increased their hedging activity against a potential correction. Their cumulative net shorts on Nifty and Bank Nifty futures rose to 220,969 contracts as of Monday, up from 124,368 contracts on 27 February — a day before the war began.
"Continued FPI selling could cap the upside to the market, though I don't expect a dramatic fall below 23,000," said Sudhir Joshi, director, Khambatta Securities.
Since the start of the war, the market has declined 5.4% to 23,815.85 on Monday.