Middle East Tensions May Deter Foreign Investment in India for Now

India's Q4 Earnings Under Pressure from US-Iran Tensions

Foreign investors remain cautious on India due to ongoing US-Iran tensions, which are expected to impact Q4 earnings. According to Karthick Jonagadla, Founder and CEO of Quantace Research, the crude oil price has risen by 25% since the war began, hitting margins in oil-sensitive and import-dependent sectors.

Oil supply concerns are unlikely to ease soon, with traffic through the Strait of Hormuz still badly disrupted. 40% of India's crude imports still move through Hormuz, despite a sharp rise in non-Hormuz sourcing. This is a concern for India, as it imports 90% of its crude and 50% of its gas needs.

Q4 earnings will feel the pressure if the US-Iran situation drags on, with the bigger issue being what companies say about costs and FY27 rather than the reported Q4 print itself. The shock from rising oil prices came late in the quarter, making it harder to assess the impact.

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Foreign investors are quickly repricing risk, with Indian stocks slipping toward one-year lows, the rupee weakening, and hedging costs for importers moving up. Foreign selling has confirmed the story, with FII outflows of Rs 56,833 crore in the March 2026 session and Rs 10,716 crore in one day on March 13, 2026.

Market expectations suggest that the downside may be limited to 1-3%, but history shows that markets usually calm down only when there is visible improvement in shipping, insurance, and supply confidence. Unless de-escalation happens fast and Hormuz traffic normalizes, the idea of limited downside sounds too tidy.

Foreign investors are likely to remain cautious on India in the near term, given the country's high dependence on oil imports. The Middle East accounted for 55% of India's crude imports in January, or 2.74 million barrels a day.

Press Note 3 relaxation is a significant policy change, allowing automatic-route investment with beneficial ownership up to 10% and non-controlling. The obvious beneficiaries are electronics, capital goods, components, polysilicon, ingot-wafer, solar manufacturing, and other advanced manufacturing areas.

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IT sector expectations remain reasonably stable, with Nasscom expecting industry growth of 6.1% in FY26 and a similar trajectory for FY27. The sector's growth profile will increasingly depend on how effectively companies adapt to the GenAI-led shift in technology spending.