New Delhi: Foreign investors adopted a cautious approach, offloading Indian equities worth close to Rs 3,776 crore so far this month owing to a spike in US bond yields and uncertainty over the interest rate environment both domestically and globally.

Debt Market Optimism

In contrast, they are bullish on the debt market and injected Rs 16,560 crore during the period under review, data from the depositories showed.

Equity Outflows and Contributing Factors

According to the data, Foreign Portfolio Investors (FPIs) pulled out a net sum of Rs 3,776 crore from Indian equities this month (till February 16). This came following a net withdrawal of Rs 25,743 crore in January. With this, the total outflow for this year has reached Rs 29,519 crore.

Impact of US Bond Yields

“The spike in US bond yields triggered by higher-than-expected consumer price inflation led to sustained selling by FPIs,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. (Also Read: India’s Forex Reserves Decline USD 5.2 Billion To Come Off 1-Month High)

Factors Affecting Investor Sentiment

Also, the latest selling could be attributed to the uncertainty surrounding the interest rate environment, both domestically and globally, said Himanshu Srivastava, Associate Director Manager Research at Morningstar Investment Research India.

FPI Strategy and Market Dynamics

According to Vijayakumar, the selling by FPIs in equity would have been much higher in response to the rising US bond yields. But FPIs have been consistently losing the tug of war with DIIs and, therefore, they are a bit reluctant to press aggressive selling. They will have to buy the same stocks later, which they have been selling when conditions are favorable for buying.

Debt Market Growth Drivers

On the continued bullish stance in the debt markets, Morningstar’s Srivastava attributed it primarily to the announcement of the inclusion of Indian government bonds in the JP Morgan Index, coupled with the country’s relatively stable economy.

Impact of JP Morgan Index Inclusion

This came following a net investment of Rs 19,836 crore in the debt markets in January, Rs 18,302 crore in December, Rs 14,860 crore in November, and Rs 6,381 crore in October, data showed. In September 2023, JP Morgan Chase & Co announced that it will add Indian government bonds to its benchmark emerging market index from June 2024. The move influenced the inflow in the country’s bond markets in the past few months. (Also Read: Want To Save Money On Taxed Income? Check THESE 5 Tax-Saving Instrument)

Overall Market Flows and Historical Context

Overall, the total FPI flows for 2023 stood at Rs 1.71 lakh crore in equities and Rs 68,663 crore in the debt markets. Together, they infused Rs 2.4 lakh crore into the capital market.

The flow in Indian equities came following a worst net outflow of Rs 1.21 lakh crore in 2022 due to aggressive rate hikes by central banks globally. Before the outflow, FPIs had invested money in the last three years.