Foreign equity investors are bullish on Indian equity market and are pouring money into it, while, debt investors remain cautious, says a DBS report.
According to the global financial services major, foreign equity investors have made year-to-date inflows of USD 2.2 billion, but this optimism was not shared by debt investors, who pared holdings by USD 620 million.
Moreover, the debt investment quotas also remained unsubscibed in May, a first since last two years.
Foreign investors are not bullish on debt as there is an uptick in inflation trends and this has reduced the prospects of a scope of a accomodative policy stance by the Reserve Bank of India.
“Apart from the pure supply and demand dynamics, a couple of domestic and external catalysts have also been at play. Firmer CPI/WPI inflation prints in April 2016 have narrowed the odds of a rate cut at the next Reserve Bank of India meeting,” DBS said in a research note.
Moreover, despite the positive monsoon forecast, warmer than usual weather conditions in the country have underpinned food inflation in May.
Good spatial and temporal spread of the monsoon rains are crucial to keep inflation under check and prevent a spill over into inflationary expectations. Besides, Pay commission changes are also due, while global commodity prices are also up 50 per cent from January this year, it said.
“Debt interests are thereby hurt by the limited visibility for rate cuts and the central bank more intent on easing policy through better transmission,” the report said.
Likelihood of another tranche of open market operations this week and upcoming state bond issuance will keep the mood cautious, it added.