Foreign portfolio investors: The back-seat driver in market dashboard

Flows go into reverse gear on rising US bond yields

After pumping in close to $20 billion in the preceding five months, foreign portfolio investors (FPIs) have yanked out $220 million from domestic stocks this month. The selling by overseas funds has led to turbulence in the domestic markets, with benchmark indices swinging wildly last week.

The yield on the 10-year US government security rose as much as 27 basis points this week to hit a nine-month high of 4.19 per cent before cooling off a bit on Friday.

Analysts don’t rule out further selling by FPIs if US bond yields stay at elevated levels as the threshold risk-free rate for investing in equities turns unattractive.

Inflows from domestic funds have helped India reduce its dependence on overseas investors. However, during bouts of FPI selling, the domestic markets tend to underperform. This has been demonstrated in the past two weeks.

From its peak on July 20, the benchmark National Stock Exchange Nifty is down 2.3 per cent, even as the Morgan Stanley Capital International Emerging Markets (EMs) Index has remained flat.

During the last seven trading sessions, FPIs have sold stocks worth Rs 8,545 crore in the cash market.

A sharp spike in the US 10-year bond yield above 4 per cent is a near-term negative for capital flows into EMs.

“If the US bond yields remain high, FPIs are likely to continue selling or at least refrain from buying,” observes V K Vijayakumar, chief investment strategist, Geojit Financial Services.