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- India is projected to be the world’s fastest-growing large economy in 20261, but the country faces a number of headwinds.
- Trade policy uncertainty continues to weigh on the world’s fifth-largest economy, while the conflict in the Middle East has put a squeeze on oil imports.
- Meanwhile, the country has struggled to tap the AI boom as investors chase opportunities elsewhere, such as in South Korea and Taiwan.
The war in the Middle East has all but halted transit through the Strait of Hormuz. Prior to the conflict, 38% of the world’s supply of crude oil passed along this vital global trade route2 (Figure 1). Many countries have been able to offset this supply crunch with strategic reserves, but they are rapidly declining, and oil prices remain stubbornly high3.
Figure 1: Passage has almost ground to a halt.
As the world’s third-largest oil importer4, 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. Net foreign direct investment (FDI) inflows have been in decline over the last year amid rising global trade tensions, which has led the Indian rupee (INR) to weaken against the US dollar (Figure 2).
Figure 2: Indian rupee under pressure
Net FDI inflows decreased from US$2.2bn in the 2025 fiscal year (FY) to around US$1.7bn in FY 20265. Over the last 12 months, the rupee has fallen 11% against the US dollar6. India’s blue-chip Sensex index, meanwhile, fell more than 13% between mid-February and the end of March this year7, although 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. 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,” he says.
At the same time, global capital has been heavily absorbed by the AI trade, favouring tech and semiconductor companies in South Korea and Taiwan. The former’s KOSPI Index has risen 74% YTD and hit a new record high in May, passing 7,000 for the first time8.
“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 capex cycle remains dominant,” says Schulz.
Previous Market Snapshot
8 May 2026 – South Korean chip stocks shine amid tech rally
South Korean semiconductor groups surge as investors remain bullish on AI-driven memory demand.
1 May 2026 – Big tech dominates as US equities hit record highs
How did markets respond to the Q1 earnings season?
24 April 2026 – Markets move higher on ceasefire announcement
Risk appetites revived by the prospect of an end to the conflict.
17 April 2026 – Iran war reframes Asia investment focus
Many Asian countries are net energy importers.
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