How Global Conflicts Are Shaping FPI Sentiment on Indian Market

by Ashok

Posted on June 20, 2025

How Global Conflicts Are Tempering FPI Optimism on India

Foreign Portfolio Investors (FPIs) have become increasingly cautious about India’s outlook in 2025, with global conflicts and geopolitical tensions playing a significant role in shaping sentiment and investment flows.

Key Drivers of FPI Caution

• Geopolitical Tensions and Volatility: Ongoing global conflicts, such as the recent India-Pakistan hostilities and broader geopolitical realignments, have heightened market volatility and discouraged risk-taking among FPIs. These tensions, combined with sanctions regimes and supply chain disruptions, have made investors more wary of allocating capital to emerging markets like India.
• Interest Rate Uncertainty: Fluctuating interest rate outlooks in the US and Europe have made Indian assets relatively less attractive, as investors weigh the risks of currency depreciation and capital repatriation.
• Global Risk-Off Sentiment: Amid uncertain global cues, many investors are shifting from equities and IPOs to safer assets, reducing FPI flows into Indian markets.
• Currency and Commodity Risks: Fears of rupee depreciation, triggered by rising oil prices and a widening current account deficit, have further dampened FPI enthusiasm. High global oil prices increase India’s import bill and pressure the rupee, eroding returns for foreign investors.

Recent Market Dynamics

• Short-Term Outflows and Volatility: In early 2025, India experienced some of the largest FPI outflows among emerging markets, reflecting heightened investor caution amid geopolitical and global uncertainties. For instance, after the May 2025 India-Pakistan strikes, the Nifty and Sensex showed resilience, but FPI flows remained sharply negative.
• Erratic Flows Despite Resilience: While Indian markets have historically treated such geopolitical crises as temporary shocks, FPI flows have been erratic. Sharp sell-offs are often followed by rebounds, but the underlying caution persists due to the unpredictable global environment.
• IPO Market Impact: The uncertainty has also led to slower IPO activity, overvaluation concerns, and muted retail participation, further reducing FPI opportunities in new listings.

Broader Context and Medium-Term Outlook

• India’s Structural Strength: Despite global headwinds, India’s macro fundamentals remain robust, with strong domestic consumption, government-led manufacturing initiatives, and a positive growth outlook. The IMF projects India will soon become the world’s fourth-largest economy, and the central bank forecasts GDP growth of 6.5% for the current fiscal year.
• Resilience to Regional Conflicts: Analysts note that past conflicts with Pakistan and China have had only a limited and short-lived impact on Indian markets. Unless hostilities escalate into a full-scale conflict, global investors are expected to maintain their positions, especially as India continues to secure trade agreements and demonstrate economic stability.
• Emerging Market Dynamics: The cautious approach by FPIs is not unique to India; similar trends are observed across emerging markets as global equity flows have been disproportionately directed toward the US in recent years. However, with rising global uncertainty and a potential reversal in US market dominance, some FPI interest is returning to India and other EMs.

Summary Table: Factors Tempering FPI Optimism

Conclusion

While India’s long-term economic story remains compelling, global conflicts and heightened geopolitical risks have tempered FPI optimism in 2025. The outlook is characterized by cautious confidence: FPIs are wary of short-term shocks but recognize India’s structural strengths and resilience. Unless global or regional tensions escalate dramatically, India is likely to retain its appeal as a key emerging market destination, even if FPI flows remain volatile in the near term.

Ref: Emerging markets outlook: FPI flows, indian market resilience, and shifting global dynamics