Foreign portfolio investors (FPIs) have pulled out a record $6 billion from the Indian debt segment in the first six months of calendar 2018. This is the highest outflow witnessed in the first half of any calendar year from the data available since 2002. At this rate, the segment is set to witness record outflows for the full calendar.
The highest outflow so far has been in 2013, when FPIs sold $7.97 billion in debt. The second highest outflow was in 2016 when FPIs pulled out $6.36 billion.
After pumping in a robust $23 billion in the Indian debt segment in 2017, the year 2018 too began on a positive note. The FPIs bought Indian debt worth $1.29 billion in January. But the trend started to reverse thereafter as FPIs turned net sellers in February. The sell-off has intensified since March.
US yields spike
A surge in the US Treasury yields was one of the major reasons for the FPIs to pull out money from the Indian market. The US 10-Year Treasury yields which were broadly rangebound between 2.7 and 2.9 per cent since February rose to 3 per cent levels for the first time since 2013 in May. The yields spiking to a high of 3.11 per cent in May resulted in an outflow of $2.9 billion from the Indian debt in that month, the highest since November 2016.
Interest rate hike
The second factor that is keeping FPIs on tenterhooks is the continuing interest rate hikes from the US. The new Federal Reserve Chairman Jerome Powell who took over in February increased the rates in March and left unchanged the central bank’s plan for a total of three increases this year. However, in its last meeting in June, it increased the rates again and hinted that there could be a total of four rate hikes this year. With two more rate hikes likely for the rest of the year, the FPI outflows may continue in the coming months as well.
Longest selling streak
The FPIs have been on a strong selling spree since February. They have remained net sellers of Indian debt for five consecutive months since February. This has been the longest selling streak since 2013 when the FPIs sold for six consecutive months between June and November.
Even on a weekly basis, the FPIs have been selling consistently over the last eleven weeks since mid-April – the longest since 2013 when they sold for fourteen consecutive weeks between June and August.
The $5.9 billion outflow in this quarter (April to June) is the highest outflow seen in the first quarter (Q1) of any financial year.