Foreign investment in India faces headwinds as currency restrictions increase hedging costs for bonds, while earnings uncertainties loom over equities. The Reserve Bank of India's measures to stabilize the rupee have made it more expensive for overseas investors to hedge against currency fluctuations. One-year hedging costs in the onshore market have risen by approximately 30 basis points, with offshore costs climbing nearly 70 basis points, reaching a 12-year high. This makes investing in Indian government bonds less attractive, as higher hedging expenses erode potential returns.
Adding to the pressure, rising oil prices due to geopolitical tensions are impacting India's economic outlook. As a nation heavily reliant on oil imports, India is particularly vulnerable. Foreign investors have divested approximately 211 billion rupees ($2.26 billion) in Indian government debt since late February, with sales accelerating after the foreign exchange curbs were announced. Analysts suggest that even a decrease in oil prices may not immediately restore investor confidence, citing persistent currency stability concerns.
Equity investors are also concerned, having sold about $38 billion of Indian shares since the start of 2025, with a record $12.7 billion outflow in March. Elevated valuations, AI-driven disruption risks, and softening earnings momentum were already challenges. Brokerages are now cutting earnings forecasts, with some warning of significant downside risks to estimates if oil prices remain high. The Nifty 50 index has already fallen over 7% this year. Experts predict that foreign investors will likely remain in a risk-off mode in the near term, despite long-term constructive outlooks for the Indian market.