Impact of Iran War on Indian Markets: FII Withdrawals and Economic Concerns

Foreign Institutional Investors Withdraw from Indian Markets

Following the outbreak of the Iran War on February 28, the Indian market has faced significant challenges, with foreign institutional investors (FIIs) pulling out $18 billion. This withdrawal has led to a decline of over 9% in the Nifty index from its peak over the past year. According to market insights from Elara Securities, India stands out among emerging markets, experiencing outflows for the fifth consecutive week, as highlighted by recent reports.

The situation escalated after Iran's blockade of the Strait of Hormuz and the subsequent actions taken by the United States, prompting global funds to adopt a cautious stance until a comprehensive agreement is reached. Brent crude oil prices are currently hovering around $100 per barrel, which raises concerns for FIIs as high oil prices contribute to a widening current account deficit and increase domestic inflation.

Additionally, US 10-year Treasury yields are nearing 4.5%, which poses a challenge for dollar-based investors, as currency depreciation effectively reduces their returns. In contrast, markets in South Korea and Taiwan are perceived as more appealing investment options. Amidst this global volatility, Singaporean stocks are on the verge of reaching their record highs.

Since the onset of the US-Iran conflict, Singapore's Straits Times Index (STI) has remained stable, while the Indian benchmark Nifty 50 has experienced a decline of over 6%, and the S&P 500 has fallen by 1% during the same timeframe. Another concern for foreign investors is that the Nifty has shown nearly zero compound annual growth rate (CAGR) in US dollar terms since late 2021. Furthermore, there are growing fears regarding potential earnings downgrades for Indian companies due to supply chain disruptions and rising input costs stemming from the ongoing conflict.