Foreign Portfolio Investors have pulled out nearly $11.3 billion from Indian debt and equity markets in 2018, the highest since 2008.
However, it must be remembered that foreign flows into the bond market are capped and the ceiling has been gradually raised over the years.
The outflows of $6.7 billion in 2018 from the debt markets were the result of rising yields. The yield on the benchmark on November, 2016 was 6.187%; it rose nearly 200 basis points to 8.18% in September 2018. In other words, the increase over 22-month period was fairly sharp. Between August and mid-September 2018, the yield rose sharply by nearly 50 basis points. The combination of rising yields and falling rupee prompted FPIs to offload bonds, especially the sharp depreciation in the currency in the second half of the year prompted sales of bonds.
The rupee plunged 8% between August and October, hitting an all-time low of 74.39 against the greenback on October 9. The US Federal Reserve raised interest rates four times in 2018, the last increase being in December 19.
Investors sold $4.6 billion from the equities market in 2018 compared with an inflow of $8.01 billion in 2017 and $2.9 billion in 2016.
In April, 2018, the Reserve Bank of India hiked the limit on FPI investments in gilts to 30% from 20% of the outstanding stock of that security. The quota for FPI investment in gilts is Rs.2.23 lakh crore as on January 4, 2019, according to CCIL data. The utilisation as on January 3 was 74.51% for gilts.
The NSDL data show that as of January 3, the limit for FPI investments in corporate bonds is Rs.2.89 lakh crore. The utilised level is 71.14%. Even after the central bank eased norms for investing in debt, in April 2018, foreign investors trimmed their holdings in G-secs and corporate bonds in April, May and June.
Towards the end of the year, they bought bonds in November and December as the rupee regained much of its lost value following the sharp fall in the prices of crude oil.
Treasurers said the weaker rupee made it less attractive for investors to buy bonds and they were unimpressed by the easier norms. FPIs invest in various debt market instruments such as government bonds (G-secs), state development loans and corporate bonds, but with prescribed limits and restrictions by the central bank.