Analysis-Foreign investors grow more wary of India as FX curbs hit bonds, earnings risks haunt equities

India’s FX curbs have pushed 1-year rupee hedging costs up about 30 bps onshore and nearly 70 bps offshore, with NDF hedging costs briefly reaching a 12-year high. Foreign investors have sold 211 billion rupees ($2.26 billion) of Indian government debt since Feb. 28 and $38 billion of Indian equities since the start of 2025, as war-driven oil price increases and weaker earnings expectations weigh on sentiment. Goldman Sachs cut India earnings growth forecasts by a cumulative 9 percentage points over two years, while Nomura sees 10-15% downside to current-year consensus earnings and lowered its Nifty 50 target 15% to 24,600.

Analysis

The immediate winner from the policy mix is the RBI’s credibility on FX stability, but that comes at the expense of the marginal foreign buyer of Indian duration. When hedging costs rise faster than yields, the marginal carry buyer disappears first; that means the weakest point is not domestic demand, but offshore participation in onshore bond auctions and the NDF channel that anchors price discovery. In practice, this raises the probability of a slower, more disorderly return of foreign inflows even if headline geopolitics improve.

The second-order equity impact is broader than just oil exposure. Higher crude is a tax on India’s current account and therefore on the rupee, which can compress multiples for financials, domestic cyclicals, and rate-sensitive sectors simultaneously through a higher cost of capital. The bigger near-term earnings risk is not just input-cost inflation; it is management behavior — delayed capex, lower discretionary spend, and more conservative guidance — which tends to cause estimate cuts to cascade over 1-2 reporting seasons rather than all at once.

The market may be underpricing how long positioning can stay negative after the shock fades. If foreign investors have already de-risked, a modest easing in oil will not force immediate re-entry because the hedge economics still matter; that creates a “bad news has to get much better” setup for bonds. The converse is that any sharp reversal in oil or a clear RBI relaxation of FX restrictions would trigger a fast, mechanical squeeze in hedged bond demand because the carry math improves abruptly.

Key Decisions for Investors

• Stay underweight Indian duration for the next 1-3 months; avoid buying front-end G-Secs until 1Y hedge costs compress by at least 25-40 bps, because the carry math is still unattractive for foreign accounts.
• Use a relative-value short in India-focused EM bond access points versus a higher-quality Asia sovereign proxy; prefer short the most foreign-owned duration segments where marginal outflows can still widen spreads fastest.
• In equities, keep a tactical underweight on India-beta cyclicals and financials for 4-8 weeks; if oil remains elevated, these groups face both margin pressure and valuation de-rating from higher risk premia.
• Consider a defensive pair: long USD/INR upside via options against Indian equities exposure, structured for the next 1-3 months; the convexity is attractive because FX stress can persist even if equities partially mean-revert.
• If oil rolls over sharply and the RBI signals easing on arbitrage restrictions, look to re-enter Indian banks and quality domestic compounders first; they should capture the first-order relief in funding costs and sentiment.