BY THE WAY: Testing Time For Indian economy Amid Global Uncertainty
US-Iran tensions, foreign investor selling, and the Indian stock market.
Dr Noour Ali Zehgeer
The Geopolitical tensions in West Asia, the rupee’s weakness, a shift toward AI-based investment opportunities, and profit- booking in Indian markets are likely factors that prompted foreign investors to withdraw funds from the Indian market. Foreign investors (FPIs) have aggressively sold Indian equities in 2026, with outflows exceeding ₹2 lakh crore so far, weakening the rupee and reshaping market dynamics.
While large-cap financials and IT stocks have been hit hardest, FPIs are diversifying into small and mid-cap opportunities, even as domestic investors absorb much of the selling. For me, the biggest mistake our governments and finance ministers keep repeating is denial. Instead of acknowledging the problems, they defend the situation — and that defense only deepens the damage. We all know the issues: unemployment, inflation, and rupee depreciation. These are not new, nor are they unsolvable. But when leadership refuses to admit there’s a problem, the focus shifts to optics rather than solutions.
- Unemployment continues because of skill mismatches and weak manufacturing absorption.
- Inflation spikes because of food and fuel dependency, worsened by poor logistics.
- The rupee keeps sliding because of structural trade imbalances and capital flight.
The truth is simple: acknowledgment is the first step toward reform. Without it, we get cosmetic schemes and temporary fixes. With it, we could build pipelines from education to employment, strengthen energy resilience, and diversify exports. India doesn’t need more defense of the status quo. It needs courage to admit the cracks and vision to repair them. Anything less is just defending the indefensible.
In the current global landscape, financial markets are driven not only by economic data but also by geopolitical events. The ongoing tensions between the US and Iran, along with conflicting claims about a ceasefire and a possible agreement, have left global investors confused. While the US is repeatedly indicating that a peace agreement was likely to be signed on June 14, 2026, Iran, on the other hand, is calling these negotiations merely preliminary, claiming that its conditions have not been met. Protests are also taking place within Iran against the potential agreement. This uncertain environment is having a direct impact on global capital flows, investor confidence, and stock markets. India is no exception. According to the latest data released by the National Securities Depository Limited (NSDL) on June 14, 2026, foreign portfolio investors (FPIs) withdrew a massive ₹62,853 crore from Indian stock markets in the first fortnight of June 2026. This is not just a story of the Indian market but also a reflection of changing global capital trends, rising risk perception, and investors’ return to safer assets, I believe that this selling by foreign investors is not the result of a single factor, but rather the combined impact of several global and domestic factors. The most prominent reason is believed to be the relatively strong state of the US economy. The rise in US Treasury bond yields and the persistence of high interest rates there are providing global investors with opportunities for safe and secure returns. Typically, when risk-free yields rise in the US, the attractiveness of investing in emerging markets, especially countries like India, diminishes.
Conflicting claims about a possible agreement between the US and Iran have left global investors confused.
The foreign fund managers consider investing in US government bonds and dollar-denominated assets safer than risk-taking emerging markets. Consequently, capital outflows from many emerging markets, including India, accelerate. Another major factor is the growing geopolitical instability in West Asia. US-Iran tensions, concerns about oil supply routes, potential fluctuations in energy prices, and the impact on global trade have reduced investors’ risk appetite. Whenever the threat of war or conflict increases globally, investors turn to so-called “safe haven” assets. The US dollar, gold, and government bonds of developed countries become more attractive during such times. In contrast, investing in emerging markets is considered relatively riskier. This is why the Indian stock markets witnessed significant foreign capital outflows in the first half of June.
One important reason is the high valuations of the Indian stock market and profit-booking. Over the past few years, the Indian market has seen a significant rally due to the strength of the Indian economy, rising corporate earnings, the expansion of the digital economy, and active participation from domestic investors. Many major indices reached historic highs. In this situation, foreign investors have booked profits extensively to secure returns on their investments. Global fund managers often book profits in markets where they believe valuations are too high and further growth may be limited. The recent sell-off in the Indian market is also being viewed from this perspective. Furthermore, the weakness of the Indian rupee has also been a concern for foreign investors. If a foreign investor makes profits in Indian stocks, but the value of the rupee depreciates against the dollar during the same period, the actual dollar-based return is reduced. This is why currency risk also influences the decisions of foreign investors. The rupee’s weakness in 2026 has further increased foreign investor concerns.
If I look at NSDL data a clearer picture. Foreign portfolio investors have been net sellers of Indian equities every month in 2026, except for February. In January, they withdrew approximately ₹35,962 crore. The situation improved slightly in February, with investments of approximately ₹22,615 crore, the largest monthly inflow in 17 months. However, March saw record outflows of ₹1.17 lakh crore. Withdrawals of ₹60,847 crore were recorded in April and ₹32,963 crore in May. In the first fifteen days of June alone, ₹62,853 crore have already been sold. With this, total foreign outflows in 2026 have reached approximately ₹2.87 lakh crore, far exceeding the total outflows of ₹1.66 lakh crore for the entire year 2025. These figures have been taken from digital electronic media.
These figures indicate that foreign investors stance is not merely a short-term reaction but part of a broader global strategic rebalancing. In recent months, artificial intelligence-based companies and the US technology sector have attracted significant investment. Many global funds are withdrawing funds from emerging markets and investing in US technology companies and AI-related opportunities. This has put pressure on the stock markets of many countries, including India. However, despite this continuous selling by foreign investors, the Indian stock market has not completely collapsed. This is largely due to the strong participation of domestic institutional investors and retail investors. Over the past few years, investments by mutual funds, systematic investment plans, pension funds, and insurance companies in India have increased significantly. Domestic investors have largely purchased the shares being sold by foreign investors. This is why market volatility has increased, but a widespread decline has not occurred. This structural strength of the Indian capital market appears to be stronger than in the last decade.
This situation also provides an important signal from the perspective of the Indian economy. Previously, selling by foreign investors had a severe impact on the market, but now a significant portion of domestic savings is flowing into financial assets. This is gradually reducing the Indian market’s dependence on foreign capital. While foreign investment remains significant, the increasing role of domestic investors is providing stability to the market from an economic perspective, continued outflows of foreign capital can impact the current account deficit, the rupee exchange rate, and capital market liquidity. Therefore, the Reserve Bank of India and policymakers are working on various measures to attract foreign investment. In recent months, steps such as foreign exchange management, expanding access to the bond market, and simplifying foreign investment regulations have been taken to maintain global investor confidence.
The coming weeks will be crucial for international investors. The outcome of the US-Iran talks, the US Federal Reserve’s monetary policy, decisions by the Japanese central bank, and indicators of global economic growth will determine the direction of capital flows. If tensions in West Asia ease and oil prices stabilize, it will be positive for a major oil-importing country like India. If the conflict escalates, it could put additional pressure on energy costs, inflation, and foreign investment flows.
(STRAIGHT TALK COMMUNICATIONS EXCLUSIVE)
