Impact of Global Market Volatility on Emerging Markets
During times of global market volatility, investors typically reduce their risk exposure and withdraw from emerging markets, such as India. This withdrawal is primarily due to the weakening of the local currency, which can negatively impact returns for foreign investors.
Foreign Portfolio Investors (FPIs) and Indian Market
- FPIs have been selling Indian shares amid geopolitical tensions in West Asia and fluctuating crude oil prices, causing the Indian rupee to depreciate significantly.
- The Indian rupee hit a record low of 92.48 per dollar recently.
- FPIs have sold Indian shares worth $5.73 billion in the current month, marking the largest outflow in 14 months.
- Since the beginning of 2025, FPIs have been net sellers in 10 out of 15 months.
Impact on the Indian Rupee
- The sale of assets denominated in the Indian rupee decreases demand for the currency, leading to its depreciation.
- Continued sale of shares and government bonds by foreign investors results in an outflow of foreign currency, similar to the effects of a trade deficit due to high oil prices.
Economic Outlook and Challenges
- The Indian economy faces challenges despite supportive growth, policy, and demographics due to increasing risks.
- Disruptions from AI are impacting the IT services sector, while export industries are facing competition from China and Southeast Asia.
Foreign Direct Investment (FDI) Trends
- FDI, considered a stable form of foreign investment, saw net outflows in three of the last four months of 2025, prior to the West Asia conflict.
- The Economic Survey for 2025-26 highlighted that India’s strong macroeconomic performance is not reflected in currency stability or capital inflows.
Currency and Oil Price Projections
- The rupee's depreciation past 90 and 91 per dollar in December breached 92 earlier this month.
- If crude oil averages $100 per barrel in 2026-27, the rupee could weaken to 98.5 per dollar according to QuantEco Research.
Stock Market Performance
- Indian indices, Sensex and Nifty 50, dropped over 5% this week, marking their biggest weekly fall in nearly four years.
- The decline is less severe compared to South Korea’s Kospi, which fell by over 13% during the same period.
Geopolitical and Economic Vulnerabilities
- According to Nomura, Thailand is most vulnerable to Iran's closure of the Strait of Hormuz, followed by South Korea and India.
- Indian markets are projected to remain volatile due to ongoing geopolitical tensions and elevated energy prices.
