Foreign investors pulled out close to Rs.6,000 crore from the Indian debt market in May after pumping in huge money in the preceding month.
However, foreign portfolio investors (FPIs) are bullish on the stock market as they put in Rs.1,495 crore during the same period.
Market experts attributed the outflow to weakening of the rupee. Besides, possible action by the US Federal Reserve has also hit investor sentiment.
"The recent rejig from debt to equity on part of FPIs indicates their strong preference for the Indian growth story.
With stocks at an attractive valuation, it makes sense to enter the equity market right now," SAS Online Chief Operating Officer (COO) Siddhant Jain said.
"Also, the recent changes in Mauritius tax treaty might have prompted FPIs to pull out of debt, step back and consider their tax implications," he explained.
He further said FPI debt outflow is primarily in corporate bonds, which mainly could be due to bonds maturing.
The data sourced from the depositories showed FPIs have sold debt securities worth Rs.5,986 crore (USD 891 million) till May 27.
The outflow comes after FPIs pumped in Rs.6,418 crore in the debt market last month. Prior to that, overseas investors withdrew a total of Rs.9,671 crore from the segment in February and March.
Moreover, in an auction conducted earlier this month, government debt securities received lukewarm response from FPIs after months of over-subscription.
Capital poured in by FPIs is often referred to as ‘hot money’ because of its unpredictability although they continue to remain the most important drivers of Indian stock markets.
This year, FPIs have invested Rs.14,406 crore in equities while withdrawing Rs.6,925 crore from the debt market, resulting in a net inflow of Rs.7,481 crore.