Foreign investors have pumped $4.2 billion in the country's capital market in May due to finalisation of GST rates for the bulk of the items and Prediction of a normal monsoon.
Interestingly, most of the funds have been invested in the debt markets by the 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 the stable outlook for the Indian currency bodes well for FPI flows into debt market," Sharekhan Head Advisory Hemang Jani said.
According to latest depository data, FPIs invested a net Rs 7,711 crore in equities last month, while they poured Rs 19,155 crore in the debt markets during the period under review, translating into a net inflow of Rs 26,866 crore ($4.2 billion).
This comes following a net inflow of close to Rs 94,900 crore in the last three months (February-April) on several factors, including expectations that BJP's victory in recently held assembly polls will accelerate the pace of reforms.
Prior to that, such investors had pulled out over Rs 3,496 crore from debt markets in January.
"FPIs sold into Indian equities in the first few days of May. It was only in the second week that they started buying. The most prominent reason is the expectation from the 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, in addition to a forecast of normal monsoon also led to positive sentiments," Himanshu Srivastava, Senior Analyst Manager Research at Morningstar India said.
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. They did that in April and they can again use this opportunity to book profits going forward.
"The flow is largely driven by expectation, and for the flows to sustain, the government has to meet those expectations. Monsoon will be another thing to watch out for as it tends to have big economic implications," he added.
With the latest inflow, total investment in capital markets (equity and debt) has reached Rs 1.21 lakh crore this year.
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