Indian Equities Face Headwinds as Geopolitical Tensions Rise
February saw a resurgence of foreign investment in Indian equities, with inflows reaching Rs 22,615 crore. However, escalating tensions in the Middle East, particularly the conflict between Iran and Israel, are casting a shadow over this positive trend, prompting a risk-off sentiment among investors.
FII Inflows and Recent Market Volatility
Foreign Institutional Investors (FIIs) demonstrated renewed interest in Indian stocks throughout February, injecting Rs 22,615 crore into the market. Despite this, a sharp sell-off on Friday, February 23, 2026, raised concerns about the sustainability of this recovery. The Nifty index closed down 1.25% at 25,178.65, although the BSE Sensex fell 1.17% to 81,287.19 1. Selling pressure was broad-based, impacting sectors like auto, financials, and FMCG, although selective buying was observed in the IT sector.
Geopolitical Risks and Investor Sentiment
The escalating conflict between Iran and Israel is fueling a “risk-off” environment in global financial markets. Experts suggest FIIs are likely to adopt a cautious “wait-and-watch” approach before making further investments in emerging markets, including India. Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, notes the uncertainty surrounding the conflict’s evolution and its potential impact on crude oil and currency markets 1.
Potential Impact on Indian Markets
Nachiketa Sawrikar, Fund Manager at Artha Bharat Global Multiplier Fund, anticipates broad selling of risky assets across both developed and emerging markets in response to the heightened geopolitical tensions 1. He predicts a shift in capital towards US securities and safe-haven assets like gold and silver, potentially leading to outflows from emerging markets. He likewise expects a continued rally in US Treasuries, oil, gold, and silver.
Sawrikar highlights India’s vulnerability due to its reliance on imported crude oil, warning that higher oil prices could widen the current account deficit, fuel domestic inflation, and put pressure on the Indian Rupee 1.
Sectoral Shifts in FII Investment
While FIIs increased their investments in February, their strategy showed sectoral variations. They reduced their holdings in IT stocks following concerns related to Anthropic and ongoing weakness in the sector, but increased investments in financial services and capital goods 1. Approximately Rs 19,782 crore was invested in the secondary market, with an additional Rs 2,832 crore entering the primary market.
Year-to-Date FII Trends
Despite the February inflows, FIIs remain net sellers in Indian markets for 2026, with cumulative outflows of Rs 13,347 crore. In 2025, FII activity was erratic, resulting in net outflows of Rs 1,66,286 crore, influenced by trade deal delays and premium valuations. January 2026 saw a significant exodus of Rs 35,962 crore 1.
Broader Market Implications
The Israel-Iran tensions are contributing to volatility in global markets, impacting crude oil prices, and potentially driving investment towards safe-haven assets. The situation remains fluid, and the extent of the impact on Indian equities will depend on the evolution of the geopolitical landscape 2, 3.