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Foreign investors have pumped in a staggering $4 billion in the Indian capital market so far this month on greater clarity on the rollout of the new indirect tax regime, GST, from July 1 and forecast of a normal monsoon.
Most of the funds, interestingly, have been invested in the debt market by foreign portfolio investors (FPIs).
"The differential spread between 10-year bond yields in the US and India is still around 4.5-5 per cent. This, coupled with stable outlook for the Indian currency, bodes well for FPI flows into debt market," Sharekhan Head Advisory Hemang Jani said.
According to the latest depository data, FPIs have invested Rs 3,282 crore in equities during June 1-23, while they poured in Rs 22,508 crore in debt markets during the period under review, translating into a net inflow of Rs 25,791 crore ($4 billion).
It follows a net inflow of more than Rs 1.33 lakh crore in the last four months (February-May) on several factors, including expectations that BJP's victory in Assembly polls this year would accelerate the pace of reforms.
Prior to that, foreign investors had pulled out over Rs 3,496 crore from the markets in January.
With the latest inflow, total investment in capital markets (equity and debt) has reached Rs 1.44 lakh crore (over $22 billion) this year.
"The most prominent reason for FPIs' net inflow is the expectation from government that it would speed up development and economic reforms in their last two years in office before going for elections in 2019.
"The government finalising GST rates and expectation that it will be rolled out on time (July 1), in addition to the forecast of normal monsoon also led to positive sentiment," Himanshu Srivastava, Senior Analyst Manager Research at Morningstar India said.
Besides, markets regulator Sebi's move of relaxing entry rules for FPIs willing to invest directly rather than via participatory notes (P-Notes) is expected to help in positive net inflow.
Going forward, there are few challenges but not strong enough to disrupt the current trend. Markets and the rupee are surging higher, which offer a good profit booking opportunity for FPIs.
"The flow is largely driven by expectation, and for the flows to sustain, the government has to meet those expectations," he added.
