Ever since the war began, on closing price basis, the Indian market has been among the worst performers in Asia, with the Sensex losing around 10 per cent, compared with 7-9 per cent in Kospi (South Korea), 6-8 per cent in Nikkei 225 (Japan), and 3-5 per cent in Hang Seng (Hong Kong) cushioned by mainland inflows, while only the Shanghai Composite Index showed some resilience, declining only by around 1-2 per cent. The Sensex’s fall is not a random correction but a global repricing of risk, driven by non-stop FPI outflows, rising US Bond yields and strengthening of the US Dollar Index (DXY).
The FPIs hold roughly 18-20 per cent of India’s free-float market capitalisation which was at around $800 billion in February 26, and have been net sellers in the stock markets for quite some time now. FPIs have withdrawn about ₹1.5 lakh crore, or around 1.5-2 per cent of their total equity holdings since this war began, and during the 15-day stretch from March 4-19, have withdrawn almost ₹90,000 crore, the largest continuous outflow in two decades, making Nifty shed 10 per cent of its value. The largest outflows are seen in financials, IT, and large-cap consumption stocks which dominate the Sensex. It also points out an inherent weakness of our financial markets in which the FPI determine the marginal price-setting in equities, while domestic investors only buy the shares that the FPIs are selling, but cannot push the market upwards.
Another determinant of the market behaviour is the yield of 10-Year US Treasury Bonds.
Once it crosses the 4.3-4.8 per cent crucial threshold, it outcompetes the risk-adjusted returns on the emerging market equities. The average expected returns from the stock markets in India range between 10-12 per cent, with risk free returns (bank FDs, yield of government bonds) remaining round 5-6 per cent, giving investors an extra return of 4-7 per cent over risk-free assets.
Attractive $ assets
But once markets start falling and the US treasury yields start rising, this equity risk premium of investors collapses. and investing in risk-free dollar bonds becomes attractive. This reallocation in turn strengthens the DXY, as global capital flows into dollar assets, exerting pressure on emerging market currencies. Every percentage rise in DXY is associated with sharp decline of emerging market equities and currencies. Between February 27 and March 23, the Sensex plunged to 72,596, falling by 9 per cent. During the same period, the DXY rose by just over 1 per cent, while the Rupee weakened from 91 to almost 94, nearly 3 per cent.
Sustained capital outflows and a stronger dollar will put further pressure on the rupee, which has since beaten 95 to a dollar. With oil prices spiking above $115 per barrel due to fears of supply disruptions in the Strait of Hormuz, pressure on the rupee is likely to intensify further.
Overvalued Indian market
It is widely believed the Indian stock market is highly overvalued, with Price/Earning (PE) Ratio of over 20, about 40-60 per cent higher than their emerging market peers, and a correction was long-overdue. Besides, the Sensex is heavily skewed towards energy, financials and IT. These three sectors are under immense pressure due to geopolitical reasons, margin pressure due to rising cost of funds and the disruptive impact of AI.
While SIPs provide substantial support, they cannot offset large FPI exits. The exits from Indian stocks find entry into US treasury bonds giving over 4 per cent returns, and US stock markets, with the rest moving towards gold, energy assets, and dollar money markets.
Sensex is falling not because the economy is underperforming, but because the global opportunity cost of capital is rising. But the US is also facing rising fiscal deficit and debt ratios, imposing limits on prolonged dollar strength. The Fed may be forced to cut rates. Falling bond yields will drive capital flows back into emerging markets, weakening the dollar – and strengthening the rupee.
The writer is a former Director General of CAG of India
Published on April 8, 2026