June quarter records the highest ever inflows into Indian debt

The first quarter of the fiscal that ended last week has been robust in terms of the foreign money inflows into the country. Foreign Portfolio Investors (FPIs) have poured a record $10.1 billion into the Indian debt segment in this quarter (April to June), the highest ever for any quarter, since records have been maintained since 2002. This has surpassed the earlier record inflow of $9.2 billion witnessed in 2014 for the quarter ending 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.

Weak beginning

The new 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 US presidential 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 February, when they bought $887 million, thereby, giving a slight breather.

Elections turn the table

The actual turnaround came in March. The resounding victory of the ruling Bharatiya Janata Party (BJP) in the Uttar Pradesh state Assembly elections came as a major trigger for this turnaround. This event led the Indian rupee to break above the key level of 66 in March and strengthen towards 64 against the US dollar. The level of 66 restricted 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 to surge to record highs. A strong rupee and the stock markets saw FPIs pouring money into the Indian market. The debt segment saw an inflow of $3.9 billion in March and has been witnessing average inflows of $3.5 billion every month since then.

Fed no more a threat

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 in line with its plan. Also, the US Fed is clear on not to repeat what had happened in 2013 when it began the tapering of quantitative easing. It has also promised to keep the market well informed about its plans 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 FPI money going out of the country. However, any political uncertainty between the global majors might create some volatility. But, apart from that, under the prevailing circumstances, if the trend continues, FPI flows into the debt segment are likely to hit or even surpass the previous record of $26.25 billion seen for the whole year in 2014.

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