Foreign investors have pumped over Rs 29,000 crore into the country’s capital market in June, making it the highest inflow in three months, enthused by the GST and forecast of a normal monsoon.
This also marks the fifth consecutive monthly inflow by overseas investors. Interestingly, most of the funds have been invested in the debt markets by foreign portfolio investors (FPIs).
“The differential spread between 10-year bond yields in the US and India is still around 4.5-5 per cent. This, coupled with stable outlook for the Indian currency, bodes well for FPI flows into debt market,” Sharekhan Head Advisory Hemang Jani said.
According to latest depository data, FPIs invested Rs 3,617 crore in equities last month, while they poured in Rs 25,685 crore in debt markets during the period under review, translating into a net inflow of Rs 29,302 crore ($4.55 billion).
This was the highest net inflow by FPIs since March, when they had pumped in Rs 56,261 crore in the capital markets.
The latest inflow comes following a net infusion of over Rs 1.33 lakh crore in the previous four months (February-May) on several factors, including expectations that BJP’s victory in Assembly polls will accelerate the pace of reforms.
Prior to that, such investors had pulled out over Rs 3,496 crore from debt markets in January. With the latest inflow, the total investment in capital markets (equity and debt) has reached Rs 1.47 lakh crore (over $22.65 billion) this year.
“The most prominent reason for FPIs’ net inflow is expectation from the government that it would speed up development and economic reforms in their last two years in office before going for elections in 2019.
“The government finalising GST rates... in addition to forecast of normal monsoon also led to positive sentiment,” Himanshu Srivastava, Senior Analyst Manager Research at Morningstar India, said.
Besides, SEBI's move of relaxing entry rules for FPIs willing to invest directly rather than via participatory notes (P-Notes) is expected to add to the momentum.
Going forward, there are a few challenges but they are not strong enough to disrupt the current trend. Markets and the rupee are surging higher, which offer a good profit-booking opportunity for FPIs.
“The flow is largely driven by expectation, and for the flows to sustain, the government has to meet those expectations,” he added.