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Overseas investors have so far pulled out a massive $2 billion from equity markets this month, unnerved by a slowdown in manufacturing and services sectors, with muted corporate earnings adding to fears.
However, FPIs have ploughed in over Rs 13,000 crore in debt markets during this period.
According to the latest depository data, FPIs withdrew a net sum of Rs 12,626 crore ($1.96 billion) from stock markets during August 1-24.
This follows a net inflow of over Rs 62,000 crore in the past six months in February-July 2017. Prior to that, they withdrew close to Rs 1,200 crore.
After taking into the account the latest outflow, the total investment in equity markets stood at Rs 48,329 crore ($7 billion) this year.
"FPIs took profits in equities as growth slowed and corporate earning growth remained lacklustre. Valuations of Indian equities were already expensive coming into the second quarter of the fiscal," Bajaj Capital Senior V-P and Head Investment Analytics Alok Agarwala said.
"As the slowdown in growth became more evident from various data releases (services and manufacturing PMI) and corporate earnings growth remained weak in the first quarter, valuations started looking all the more expensive. Heightened volatility in a key stock (Infosys), which is a favourite among FPIs, also raised concerns," he added.
Services sector activity plunged to its lowest level in about four years. The manufacturing sector in India too contracted in July.
However, the debt markets retained its allure among FPIs, aided by weak inflation and high real rates.
"A strengthening currency, political stability and high yields in the corporate bond markets added to the attraction. Going ahead, we believe that with FPIs exhausting 99 per cent of their limit in the corporate bond space, flows in debt shall decelerate, unless fresh limits are opened up," Agarwala added.