Foreign portfolio investors (FPIs) remained net sellers of government securities under the Fully Accessible Route (FAR) throughout October, marking the first month of net outflows since April.
According to data from the Clearing Corporation of India (CCIL), FPI investment in government securities under the FAR route declined to Rs 2.48 lakh crore as of October 31, down from Rs 2.50 lakh crore as of October 1.
FPIs outflows were primarily driven by volatility in the rupee, narrowing interest rate differential between the US treasury yields and the yield on the Indian government bonds, and falling expectations of a deep rate cut by the US Federal Reserve in its upcoming monetary policies, said market participants.
“US yields have risen sharply despite a 50 basis points rate cut. US yields are back to their previous levels, and it is well above 4%. And it is most likely that it will touch 4.50% levels in the coming days. Plus, this month rupee has been under constant pressure due to the strong dollar index driven by ongoing global tensions,” said a dealer with a foreign bank.
In the last few days, the yield on US Treasury papers has gone up by 58 basis points (bps). When the interest rate differential narrows, emerging market debt becomes less lucrative to foreign investors, hence they increase their investments in a safe haven asset. Additionally, there are worries that the US Fed may be less inclined to cut rates, even though there is the expectation of another 50 bps rate cut. This led to a sharp rise in yield in the US, which led foreign investors to pull out money from emerging markets.
As recent polling data indicates Donald Trump, a presidential candidate from the Republican party, will win the upcoming US Presidential elections, there have been rising bets that the US Fed may go for a shallow rate cycle instead. Trump’s policies are usually inflationary in nature, hence any deep cut may trigger a rebound in the inflation rate, traders said.
The rupee has remained under pressure due to foreign investors pulling out of the Indian equity market driven by tensions in West Asia and cheaper valuations in the Chinese market. Additionally, global investors are facing jitters ahead of the US Presidential election results.
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