Foreign portfolio investors (FPIs, also FIIs) have been pouring money into Indian stocks since March this year, after being net sellers in the first two months of the 2016 calendar year. However, they are not bullish on debt given the diminishing hopes of a rate cut in the wake of a sharp rise in inflation last month.
FPIs have made a net investment of about $2.06 billion (about Rs. 14,013 crore) in Indian equities till May 23, according to data available with Central Depository Services (India) Limited.
This is in sharp contrast to their position in debt where they have been net sellers to the tune of about $800 million. In addition to little possibility of a rate cut by the Reserve Bank of India (RBI) when it meets next month for its second monetary policy review this year, a possible interest rate hike by the U.S. Federal Reserve next month has reduced apetite for Indian debt.
This explains the lacklustre participation by FPIs (FIIs) in the recent auctions for government bonds, according to an analyst.
"The cautious mood also saw debt investment quotas left undersubscribed at the recent auction a first since two years," Radhika Rao, economist, group research, DBS Bank, said in a note on Tuesday.
"Apart from pure supply and demand dynamics, a couple of domestic and external catalysts have also been at play. Firmer CPI/WPI inflation prints in Apr16 have narrowed the odds of a rate cut at the next Reserve Bank of India meeting, [sic]" she added.
Domestic macroeconomic data, along with the possibility of rate hike by the U.S. Federal Reserve has results in slowing portfolio in the debt market, Rao said.
The selling spree in the debt market partly explains the fall in the Indian rupee to the US dollar.
The domestic currency fell for the eighth consecutive day on Monday to 67.49/67.50 and opened lower at 67.62 to the greenback on Tuesday, according to a morning note by IFA Global.
FPIs and domestic institutional investors were net sellers of Indian equities worth Rs. 65.6 crore and Rs. 167.80 crore on Monday, according to provisional data released by the National Stock Exchange.
The S&P BSE Sensex was trading with gains of 57 points at 25,287 on Tuesday at around 1:20 p.m. The NSE Nifty was up 10 points at 7,741.30.