Foreign Investors Turn Cautious On India Amid FX Curbs And Rising Earnings Risks

Foreign investors have become more cautious on Indian markets as higher hedging costs following Reserve Bank of India (RBI) foreign exchange measures and rising oil prices have impacted both bond and equity investments, according to Reuters.

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RBI’s steps to stabilise the rupee, including curbs on arbitrage trades, have increased hedging costs for overseas investors. One-year hedging costs in the onshore market have risen by about 30 basis points, while offshore non-deliverable forward (NDF) hedging costs have increased by nearly 70 basis points, Reuters reported. NDF hedging costs also reached their highest level in over 12 years after the measures were introduced.

Liquidity in the NDF market has declined, making it more difficult and expensive for foreign investors to manage currency exposure. This has reduced the attractiveness of Indian government bonds for global investors.

Foreign Outflows From Bonds And Equities

Foreign investors have sold about ₹1.76 lakh crore ($2.26 billion) of Indian government bonds since February 28, when the Iran conflict began, according to clearing house data cited by Reuters. Selling activity accelerated after the RBI introduced foreign exchange measures.

At the same time, foreign investors have withdrawn about $38 billion from Indian equities since the beginning of 2025. Outflows reached $12.7 billion in March alone, marking the highest monthly outflow on record, as per Reuters data.

The country relies on imports for almost 90 percent of its oil needs. In that context, the increase in the prices of oil after the West Asia crisis will add to the concerns over macroeconomic conditions.

Effect on Earnings Projections

Increased energy prices are also likely to affect expectations with regard to corporate earnings. There have been reductions in broker forecasts for earnings growth. Goldman Sachs has reduced its earnings growth forecast for India by a cumulative 9 percentage points over the next two years, according to Reuters.

Nomura has indicated a potential 10–15% downside risk to consensus earnings estimates for the current financial year if oil prices remain elevated. The brokerage also reduced its December 2026 target for the Nifty 50 index by 15% to 24,600.

The Nifty 50 index has declined more than 7% so far in 2026, reflecting continued pressure in equity markets.

Market Positioning By Global Funds

Global asset management firms have modified their allocation strategy. Aberdeen Investments, for example, has been keeping an underweight stance on stocks in India, according to Reuters.

The increase in currency hedging expense, the lack of liquidity in the forex markets, and issues regarding earnings have impacted the stance of the foreign investor.

Recent adjustments in the flow of funds have occurred because of a change in investor sentiment, with both debt and equity markets being less active as far as foreign investment is concerned.