The Indian equity and debt markets witnessed strong inflows from foreign institutional investors aggregating to an eight-month high of Rs 22,350 crore in October. The inflows came as the government offered relief to the FIIs on minimum alternate tax, investor concerns around an interest rate hike in the US diminished and the Reserve Bank of India announced a 50 basis point cut in the repo rate (at which RBI lends to commercial banks) in September 2015.
While the FIIs invested a net of Rs 6,649 crore in the Indian equities (a five-month high), they pumped in a net of Rs 15,700 crore in the domestic debt (a nine-month high) in the month of October taking the aggregate at Rs 22,350 crore.
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While US Federal Reserve’s decision to defer rate hike in the US and Indian government’s decision to not impose MAT on FIIs lifted investor sentiment, the investment into equities in October was also a result of the strong participation by FIIs in the two large IPOs — Coffee Day Enterprises (Rs 1,150 crore) and Interglobe Aviation (around Rs 3,000 crore) — which opened for subscription in October.
As for the debt markets, a cut in repo rate by RBI along with expectation of low inflation have raised the hopes of a further rate cut and that has resulted into an increased FII investment in domestic debt.
The FIIs, which invested heavily into Indian equities ever since the hopes of a BJP- led government taking the helm at the centre strengthened in early 2014, started selling their holdings after tax authorities sent notices to foreign investors in April demanding MAT on capital gains arising out of book profits at the rate of 20 per cent. This led them to pull out their investments in May and June this year as they sold holdings worth a net of Rs 9,112 crore.
The sell-off continued from the Indian equities in August and September as concerns of slowdown in China rattled the markets worldwide.
The FII participation in domestic debt also remained subdued in the period between July and September 2015 as the market was expecting a rate hike in the US by the Federal Reserve. However, as the US decided to defer its rate hike following slowdown in China and growth concerns across the world, the FIIs came into Indian debt market seeking high return on their investment.