As rising oil prices and climbing global yields threaten a recent recovery in demand, overseas investors have once again started selling off Indian assets.

So far this month, global funds have dumped US$2.1 billion worth of Indian local stocks, following two consecutive months of buying.

Foreign investors are also accelerating their selloff of index-eligible sovereign bonds, having sold US$1.1 billion this month — after a record inflow in June, this month is on track for the largest outflow since March.

Despite strong inflows from a special dollar deposit scheme, the Indian rupee remains one of Asia's worst-performing currencies this quarter, while the 10-year government bond yield hit a two-year high this week.

After an unprecedented prolonged slump in Indian equities relative to regional peers, foreign demand had just begun showing signs of recovery, but a fresh wave of selling is now snuffing that out.

For India's heavily import-dependent economy, the rebound in oil prices is pressuring the rupee and fueling inflation, leaving policymakers with limited room to buffer market volatility after rolling out a series of measures to attract foreign investment.

UBS Group AG's head of global markets for India, Gautam Chhaochharia, said: "Oil prices will be the biggest factor determining whether India sees a fresh round of foreign outflows."

The bank expects Indian equities to remain range-bound in the near term, with valuations, share supply, and elevated oil prices likely to cap upside potential.