Mumbai: This month, foreign portfolio investors have sold Indian stocks and bonds the most in two years after a declining rupee made US assets more attractive, and rising global interest rates rendered the carry trade unviable.
Total bond and stock net sales by overseas funds touched a high of Rs 31,984 crore so far this month, show data from National Securities Depository.
Exits may quicken towards the year-end as funds compute performance bonuses for the year, dealers said. They sold a net of Rs 19,810 crore in equities, the largest monthly quantum this year. Debt sales amounted to Rs 12,167 crore.
“There is a flight to safety amid the improving US economy and rising global rates,” said Ashutosh Khajuria, CFO, Federal Bank. “Pressure has been mounting on the emerging markets. If India demonstrates better performance on macroeconomic indicators like inflation, current account and fiscal deficit, those investors would come back again.”
This year, overseas investors have net sold Rs 93,481 crore of financial assets in India, the highest ever sale at least since 2002, data showed.
US unemployment, a key economic metric for the worlds biggest economy, fell to levels last seen about five decades ago, signaling a strong labour market and rising wages. That would mean the US policymakers would continue to raise headline lending rates.
“Rising US yields along with improving global economies have triggered investment exits from emerging markets,” said Sanjiv Bhasin, Executive VP-Markets, IIFL Securities. Softer oil prices and a stable rupee should reverse the market trend, he said.
“The debt market is going through uncertainties in the non-banking sector. Once it is settled, investors should regain confidence,” Bhasin said.
Two weeks ago, the US benchmark yield climbed to 3.23%, its highest level since May 2011. High US yields are prompting dollar funds to return to US assets that carry no currency risks.
Emerging market currencies have turned volatile, risking global investors investment returns on respective currencies. The rupee hit a record low of 74.48 per dollar and is one of the worst performing emerging market currencies.
While a fall in the rupees value will erase dollar returns, wild swings necessitate deploying a hedging mechanism, which global investors otherwise avoid in a stable currency environment. Buying covers against currency fluctuations comes with a cost that cuts overall profit margins.
Many international investors consider “real returns” a key gauge for emerging market investments. Although there are multiple metrics to determine real returns, one popular mode is the difference between one-year government Treasury Bills and one-year projected retail inflation.
“With no further rate increase, the lure of India's real return may have diminished, especially when US Treasury is rising,” said Anindya Banerjee at Kotak Securities. “It would impact investor sentiment when the world is in a risk-off mode.”
The central bank did not raise the benchmark rate in its October bi-monthly monetary policy.
According to Marc Faber, a global market guru, tight monetary policies are good for the rupee, but not so good for the stock market.