If you thought that the temporary US-Iran truce would bring about a change of heart among foreign portfolio investors (FPIs) in India, well, that hasn’t happened. At least, not yet.

On 15 June, the day after the peace deal was announced, FPIs were net buyers in Indian stocks, to the tune of Rs 200 crore. But the following two days, they quickly reverted to being net sellers, offloading about Rs 750 crore each day. 

Sure, the pace of selling has slowed compared to the first fortnight of June, when they pulled out nearly Rs 40,000 crore ($4.2 billion) from Indian equities. But even at the current rate, FPIs would end up selling much more than what they did in May.

A thaw in West Asia’s hostilities should ideally have encouraged investors, including foreign ones, to step up equity purchases. If the peace holds, the pressures that have squeezed India’s macros—fuel-price hikes, current account deficit spikes, worsening balance of payments—since the war broke out in February should ease. 

Yet, foreign investors continue to sell, as they have for nearly two years now. This, despite the bellwether Sensex declining nearly 10% from its September 2024 peak and almost 5% since the conflict began.

What gives? 

For one, despite the correction, Indian market valuations still remain high, relative to other markets, making the option to cash out attractive. For another, foreign investors are also trying to protect their dollar returns from a weak rupee. Paradoxically, their sale only weakens the rupee further.

A flailing currency and fleeing foreign investors are effectively feeding into each other. 

But the declining rupee hurts many more than foreign investors. It adds to India’s inflation and hurts its macroeconomy.  

Breaking the chain would need stock valuations to come down to a level where foreign investors don’t find it worthwhile to sell. This may hurt the market temporarily, but it could help the economy.  

“You have to be clear what is more important—the economy or the market,” said Sanjeev Prasad, managing director and co-head at Kotak Institutional Equities, summing up the dilemma.

There are no easy or unanimous answers.