Foreign Institutional Investors pulled out more than $7.5 billion from Indian debt and equity put together in the month of June 2013. The withdraw has been the highest from Indian capital markets in a single month ever, thanks to our dilapidated current account deficit and currency. Since April 2013 the Indian currency depreciated more than 10% in 2 months thereby erasing all the benefits of interest rate arbitrage that existed between U.S. and India.
Investors in U.S. borrow in their home country at less than 2% and invest in Indian govt. and corporate debts at over 8% thereby yielding huge return. But since the overseas investors are borrowing in USD and investing in INR the depreciation in the invested currency beyond the arbitrage points makes it unattractive and worthless for them to stay invested. Similar is the situation for overseas equity investors, as they benchmark their return in their home currency, the depreciation in invested currency negated all the equity returns of April and May this year, which led to significant outflow from Indian stock markets as well.
The net investments withdrawn in June include outflows worth about Rs 33,135 crore ($ 5.7 billion) from the debt securities and another Rs 11,027 crore ($ 1.85 billion) from equities, data available with market regulator Sebi showed. FIIs had been aggressive buyers of bonds since the beginning of 2013 on account of higher yields offered by the government and corporate debt.
But despite the huge sell-offs this year, the net FII inflows for 2013 so far still stand at a significant Rs 63,000 crore. Debt market had witnessed a net inflow of close to Rs 25,000 crore in January-May this year.
Also read: FII Inflow Data in India since 1993