With the West Asia war once again souring investor sentiment, the key question is whether India will attract capital rotating out of the US—or whether the conflict will derail the return of foreign investors just as it was getting underway.
The timing is crucial: in February, foreign institutional investors, or FIIs, had turned net buyers, picking up Indian equities worth Rs17,147.25 crore, signalling a tentative comeback.
But that momentum was immediately reversed in reaction to the weekend's war developments: on Monday, the second day of March, FIIs offloaded Indian equities worth ₹3,296 crore. Tuesday was a market holiday.
On Wednesday, provisional BSE data showed that FIIs were net sellers of Indian equities worth Rs8,753 crore, while DIIs stepped in as net buyers, purchasing shares worth Rs12,068 crore. The two-day rout erased a staggering Rs1,653,707 crore in investor wealth—in other words, 3.6% of market capitalization, as of Friday's close, vanished.
“We believe that FPI positioning continues to be light (~3% underweight across global, Asia ex-Japan, emerging markets, and global ex-US funds), which was mainly driven by them using India as a funding market to invest in the likes of Korea, Taiwan, and China,” said Jay Kothari, head of international business, DSP Mutual Fund.
While India could be viewed as an AI hedge–with diversified sectoral opportunities and marked underperformance in comparison to developed and emegering markets over the past 12 to 24 months–the recent developments make FPIs approach any market with a bit of caution if the war escalates, he explained.
On the other hand, if the conflict ends sooner, Kothari expects flows to come back to India, driven by an earnings pickup, reasonable valuations, domestic consumption focus, and continued investment from domestic investors.
Next set of technical floors?
On Wednesday, the Nifty 50 tumbled 1.55% to close at a seven-month low of 24,480.50, while the S&P BSE Sensex dropped 1.4% to finish at 79,116.19, again a seven-month low.
With this close, Nifty 50 has breached the critical 24,570-24,600 support band on the daily chart, a zone that had previously attracted strong buying interest on two separate occasions, said Sudeep Shah, head - technical and derivatives research at SBI Securities. Mint reported Tuesday on this critical support level of the index.
“Going forward, immediate support for Nifty is seen in the 24,300–24,350 zone, which had acted as a strong base in August 2025,” he said. A sustained breach below this range could push the index down to 24,100 and then 23,800 in the near term.
On the upside, Shah sees the 24,650–24,700 zone acting as the immediate resistance.
On the Nifty 50, Tata Steel fell the most, down over 7%. The second worst performer was Tata Motors Passenger Vehicles which slumped 5.2% followed by SBI Life Insurance Co., down 5%.
The pain was sharper in the broader market, where the Nifty Midcap 100 and Nifty Smallcap 250 fell over 2% each, slipping to five-month and nine-month lows, respectively.
Among NSE sectoral indices, Nifty Metal fell 4%, the biggest laggard followed by Nifty PSU Bank, down 3.2%. Nifty Realty and Nifty Oil & Gas also dropped more than 3% on Wednesday.
Previous Iran wars and the market?
A Barclays research note dated 2 March pointed out that unintended escalation is possible, if there are large US casualties or a successful attack on Saudi oilfields. It noted: “The tail risk of a much wider conflict is greater than it has been in the past several years.”
The note, which analyzed major conflicts involving Iran over the past 50 years, found that equities typically fell in the immediate aftermath but largely rebounded over a three-month horizon.
Barclays said, “We recommend waiting for a substantial move (to see if hostilities escalate) before buying risk.”
Simply put, the bigger issue now before the markets is durability, said some experts.
“The Israel-US-Iran war will be a long-drawn affair, and any negotiations as of today seem difficult since both countries are in militarily aggressive mode. The flare up seems to be prolonged and has extended in geography, to Gulf countries,” said Shrey Jain, CEO, Stocko by InCred Money. Stocko is an online trading platform.
According to Riddhiman Jain, managing director & head of investment strategy & solutions, Waterfield Advisors, “Iran is not a conflict that resolves simply or quickly”.
He explained that unlike past geopolitical shocks that markets have discounted before, Iran straddles the Strait of Hormuz, through which the trade of 20-25% of the world’s petroleum liquids and about a fifth of global LNG, or liquified natural gas, flows. A sustained disruption would trigger a first-order supply shock, directly impacting India’s oil import bill, current account deficit, and the rupee.
The Indian rupee plunged to a record low of 92.41 against the US dollar on Wednesday. The currency breached the key 92 mark at the open, weakening sharply from its previous close of 91.47, before settling at 92.15, according to Bloomberg data.
Other chokepoints
Beyond energy, Waterfield's Jain noted the munitions angle - with the US consuming advanced ordnance that may be needed elsewhere—creating a structural overhang that markets have yet to fully price in. He was referring to the Ukraine-Russia war without naming it.
He added that markets tend to reprice geopolitical risk in waves, not in one swift move, and clarity on the Strait of Hormuz, regional alignments, and diplomacy is still evolving. For now, he advised that investors should stay steady, not opportunistic.
Meanwhile, volatility has flared sharply, with the fear gauge surging 23.4%. India VIX closed at 21.14, its highest level since 9 May 2025, signalling a decisive spike in risk aversion.
The risk-off mood was global on Wednesday. South Korea’s Kospi plunged 12%, Japan’s Nikkei slipped nearly 4%, and Hong Kong’s Hang Seng shed 2%. Selling extended to Wall Street as well, with the Nasdaq and S&P 500 each down about 1%.
Beyond the three key factors of access in the Strait of Hormuz, Brent crude prices and the rupee, and FII flows, market participants said investors should keep an eye on alignments among Gulf nations and diplomatic moves because an early de-escalation could trigger a sharp relief rally in emerging markets, including India.
If that happens, India’s structural growth narrative could reassert itself, potentially attracting capital looking beyond the US. But a prolonged flare-up may keep foreign investors cautious and sidelines crowded, keeping Dalal Street on tenterhooks, they added.