June quarter records highest ever FPI inflows into Indian debt

The first quarter of this fiscal that ended last week has been robust in terms of the foreign money inflows into the country.

Foreign portfolio investors (FPIs) poured a record $10.1 billion into the Indian debt segment in this quarter (April-June), the highest ever for any quarter on record since 2002.

This has surpassed the earlier record inflow of $9.2 billion witnessed in 2014 for the quarter ending in September (July-September). Also, the $14.57 billion inflow seen in the first half of this calendar year is the best beginning seen in any year since 2002. Additionally, the $3.9 billion inflow for the month of June is the highest ever since December 2011.

The year 2017 began on a weak note as FPIs were pulling out money since the US Presidential elections held in November 2016. The surprise victory of Donald Trump in the elections triggered the FPIs to pull out money from the Indian markets.

As a result, the Indian debt segment witnessed an outflow of $5.88 billion between November and December last year. The sell-off spilled over into the new year as well as the FPIs continued to sell $339 million in January this year.

After selling for four consecutive months, the FPIs turned net buyers of Indian debt in the month of February and they bought $887 million, thereby giving a slight breather.

The actual turnaround came in the month of March. The resounding victory of the ruling Bharatiya Janata Party (BJP) in the Uttar Pradesh Assembly elections came as a major trigger for this turnaround.

The rupee broke above the key level of 66 in March and strengthened towards 64 against the US dollar. The level of 66 was restricting the rupee from strengthening against the dollar all through 2016 and the currency was stuck between 66 and 68.85 for more than a year.

The event also helped the Indian benchmark indices surge to record highs. A strong rupee and a surging stock market saw FPIs pouring money into the Indian market.

The debt segment saw an inflow of $3.9 billion in March and it has been witnessing an average of inflow of $3.5 billion every month since then.

The interest rate hike from the US was earlier considered a possible threat for FPIs to pull out money.

But this has become a non-event for the market as the Fed is clear in its stance on the rate hike path and is left with one more rate hike for the rest of the year as per its plan.

Also, the US Fed is very clear not to repeat what had happened in 2013 when it began the quantitative easing tapering. It has also promised to keep the market well informed about its plan to begin unwinding its balance sheet.

So, unless the Fed changes this stance and comes out with more rate hikes, there is no threat of the FPI money going out of the country.

However, any political uncertainty in major global economies might create some volatility. But that apart, under the prevailing circumstance, if the same trend continues, the FPI flow into the debt segment is likely to hit or even surpass the previous record of $26.25 billion seen in 2014.