Foreign Portfolio Investors (FPIs) have continued selling Indian debt in the first seven sessions of the month – a net of $22.2 million over the period – thereby highlighting their concerns over uncertainty surrounding emerging markets that has prevailed over the last couple of months.
Market participants said that this trend could be traced back to around the time or just before President-elect Donald Trump won the US presidential election and is likely to continue for some time.
Trump’s victory prompted the market to believe that his plans surrounding infrastructural development in the US could result in an increase in the country’s borrowings and therefore, heralded a rise in the pace at which the Federal Reserve could raise
This sentiment was only strengthened when the Fed, at its meeting in December, decided to raise interest rates by 25 basis points and increased the forecast for rate hikes that could be expected over the next year from 50 bps earlier to 75 bps. As a result, FPIs exited Indian debt in large numbers over the last couple of months, net selling over $5.5 billion in the period starting November 1.
In this period, the selling has been so heavy that around 25% of the total limit for FPI investment in government securities now lies unutilised. The norm dictates that if the utilised limit crosses 90%, there would be an auction of limits for investors wanting to invest more. But the utlised limit now stands at 74.05%, which is why there hasn’t been any auction of limits since November 28 as limits are easily available at the moment.
“There is a lot of uncertainty in the minds of foreign investors and this can be said about their sentiment towards almost every emerging market (EM). The Chinese currency has been weak and so have a lot of other EM currencies and this has prompted a lot of them to take risk-averse positions,” said Ajay Manglunia, head of Fixed Income at Edelweiss Securities.
Manglunia added that the general mood of most FPIs has been very cautious over this period. Trump is slated to take office on January 21 and there is still a lot of confusion and speculation about his actions once he does.
In the period under review, FPIs have also sold Indian equities to the tune of $4 billion. This, along with redemption of FCNR(B) deposits that matured in November and December, has put a lot of pressure on the rupee, which depreciated by 2.3% over this time to close at 68.33 against the dollar on Wednesday.
Other market participants, however, took a different view to the whole situation. “More than the US economy, I would think that IIP and CPI numbers coming out tomorrow would go a long way in determining FPI sentiment going ahead. Also, the outlook for CPI going forward and GDP growth expectations could also be key deciding factors,” said Ashutosh Khajuria, CFO and president – Treasury at Federal Bank.