Oil shock weighs on India outlook

The war in the Middle East continues to essentially halt transit through the Strait of Hormuz. Prior to the conflict, 38% of the world’s supply of crude oil passed along this vital trade route. Many countries have been able to offset the supply crunch with strategic reserves, but those are rapidly declining and oil prices remain stubbornly high. 

As the world’s third-largest oil importer, India is particularly vulnerable to these inflationary pressures, which are having a knock-on impact on consumer and investor confidence. 

The country is facing multiple headwinds. Amid rising global trade tensions, net foreign direct investment flows have been in decline over the last year, decreasing from $2.2 billion in 2025 to around $1.7 billion year-to-date. That has led the Indian rupee to weaken against the US dollar, falling 11% over the last 12 months. Also. India’s blue-chip Sensex index fell more than 13% between mid-February and the end of March this year, though it has recovered some ground since then. 

Martin Schulz, Head of International Equities Group at Federated Hermes says the big sell-off in March brought some of the country’s long‑standing vulnerabilities into focus. 

“We have generally been underweight India given its elevated valuations and relatively weaker external metrics, despite its compelling growth and momentum profile,” he said. “The current backdrop has reinforced that view: higher energy prices are feeding inflation, widening the current account deficit, and putting pressure on the rupee, while capital outflows and a strong US dollar have added to near-term volatility.”

At the same time, global capital has been heavily absorbed by the AI trade, favoring tech and semiconductor companies in South Korea and Taiwan. “India’s AI exposure is more second-order than direct, particularly through IT services, which has weighed on sentiment and relative performance in the short term and is likely to continue to do so while the AI capital expenditure (capex) cycle remains dominant,” said Schulz.