"We cut our FPI inflows forecast for FY16 to USD 10 billion (including USD 5 billion FPI G-sec limit hike) from USD 20 billion earlier," global financial services major BofA-ML said in a research note.
The report said that FPI equity flows to stall until markets price in its three event risks -- Fed rate hike, earnings and Bihar polls.
"Our equity strategists expect FY16 earnings to grow 12 per cent from 1 per cent in June," the report said.
On Fed rate hike, BofA-ML said that its US economics team is now expecting the first hike on December 16, while the Bihar poll results which would be out on November 8, would impact the market's perception of reforms, it added.
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Meanwhile, the Reserve Bank yesterday relaxed curbs on foreign ownership of government debt by raising the cap to 5 per cent, a move that will bring in an additional Rs 1.2 lakh crore in Government Securities (G-Sec).
"The limits for FPI investment in the central government securities will be increased in phases to 5 per cent of the outstanding stock by March 2018.
"In aggregate terms, this is expected to open up room for additional investment of Rs 1,200 billion in the limit for central government securities by March, 2018 over and above the existing limit of Rs 1,535 billion for all government securities (G-sec)," RBI Governor Raghuram Rajan said yesterday.
The RBI's move is aimed at avoiding a repeat of 2013 when the US Fed's signal that it would end its bond purchases resulted in investors pulling out about USD 9 billion from G-Sec in June-August that year, leading to the rupee plunging to historic lows.