Is Oil Price Spike Derailing FPI Comeback?

FPIs have already withdrawn Rs 2.6 trillion from Indian equities in 2026, exceeding the outflows recorded in any previous full calendar year.

A sharp rise in crude oil prices amid renewed tensions in West Asia threatens to derail the return of foreign portfolio investors (FPIs) to Indian equities.

After remaining net buyers for eight consecutive sessions -- their longest uninterrupted buying streak since May 2025 -- FPIs have turned net sellers over the past four sessions, offloading shares worth Rs 7,443 crore.

They sold equities worth Rs 4,206 crore in the latest session alone. The reversal has coincided with a steep increase in global oil prices.

Brent crude has climbed 14 per cent over the past four sessions to $85.6 a barrel following the re-escalation of hostilities in West Asia.

From its low of about $72 at the beginning of July, the benchmark has risen nearly 19 per cent.

The US launched further airstrikes on Iran after President Donald Trump pledged to intensify the bombardment until Tehran stopped attacking ships in the Strait of Hormuz and agreed to reopen the waterway.

An interim US-Iran peace agreement signed a month ago is now close to collapse, with both sides locked in a dispute over control of the Strait of Hormuz.

For India, a sustained rise in crude prices could increase inflationary pressures, weaken the rupee, widen external and fiscal imbalances, and weigh on economic growth because of the country's heavy dependence on imported energy.

"FPI inflows into Indian equities were short-lived and paled in comparison to their prior selling streak. Foreign investors tend to view India largely through the prism of oil prices, and when crude oil rises, concerns about inflation, current account deficit, and the rupee make them nervous," said U R Bhat, cofounder, Alphaniti Fintech.

Bhat said corporate earnings remained a secondary consideration for foreign investors in the current environment.

"The immediate direction of FPI flows will depend mainly on crude oil prices and developments in West Asia," he added.

FPIs have already withdrawn Rs 2.6 trillion from Indian equities in 2026, exceeding the outflows recorded in any previous full calendar year.

US Bond Yields Drive FPI Flows

March accounted for the bulk of the exodus, with foreign investors selling shares worth Rs 1.1 trillion as the conflict in West Asia triggered a sharp spike in oil prices.

Flows had briefly turned positive in February, supported by optimism over India's trade negotiations with the European Union (EU) and a US decision to ease tariffs on Indian goods.

The conflict involving the US-Israel combine and Iran has since pushed global investors back into riskoff mode. However, market participants said crude oil was not the only factor limiting foreign investment in India.

"The biggest determinant of FPI flows into India will be the level of interest rates and bond yields in the developed world, particularly the US. With the US 10-year yield at around 4.59 per cent and shorter-term yields even higher, investors can earn attractive returns in developed-market bonds without taking on emerging-market, currency and country risks," said Pramod Gubbi, cofounder of Marcellus Investment Managers.

Elevated US yields increase the relative appeal of dollar-denominated fixed-income assets and reduce the incentive for global investors to allocate capital to riskier emerging markets.

India-specific factors such as crude oil prices, earnings growth, and movements in the rupee can influence short-term flows, but the direction of monetary policy in the developed world is likely to determine whether foreign investors return on a sustained basis, he said.

Feature Presentation: Aslam Hunani/Rediff