India’s $3.2-trillion stock market is witnessing an unprecedented foreign selloff as the surge in oil prices fuels worries of an inflation shock in the major energy-importing nation. 

While global funds have been net sellers of local equities since the start of last October, when the benchmark S&P BSE Sensex hit an all-time high, the pace of outflows has intensified since the start of the war in Ukraine. India relies on imports to meet about 85 per cent of its oil needs. 

Overseas investors have offloaded $2 billion of local shares in just two days this week, according to the latest exchange data compiled by the Bloomberg, after a record withdrawal of $2.9 billion last week. With this, $19 billion has flown out since September 30, 2021, about half of the foreign money local shares lured since the pandemic lows in March 2020. That’s pushed down the rupee to an all-time low. 

The current exodus has hit a record, exceeding the foreign outflows seen during the 2008 global financial crisis, according to the Bloomberg Intelligence analysts Nitin Chanduka and Kumar Gautam. In past instances, FII selling had generally eased when peak-to-trough outflows approached $8-10 billion, with the sole exception of the 2008 crisis. 

Even so, sustained buying by domestic investors has helped Indian stocks avoid a sharp rout in recent weeks. While the Sensex is down about 10 per cent from its October 2021 peak, the gauge is little changed so far this month. That’s when the broader MSCI Asia Pacific Index has lost 4.1 per cent in March. 

Domestic funds have infused a net almost $3 billion into local equities since end-September 2021. 

While the impact of the war in Ukraine could weigh on domestic earnings for up to two quarters, foreign investors may return when tensions cool, notes Rupen Rajguru, the head of equity investments of Julius Baer Wealth Advisors India. 

“We believe that better growth of both GDP and earnings will again attract the foreign investors once the dust settles,” he adds.