MUMBAI: Net sales of local debt by overseas investors in May are headed for an 18-month record, underscoring the diminishing appeal of emerging market assets amid steady climbs in crude oil prices globally and the cost of capital in the US.
Overseas investors have sold around Rs 18,971 crore worth of debt securities until May 29, the largest monthly net outgo since November 2016, show data from National Depository Securities. Collectively, foreign portfolio investors have sold Rs 28,518 crore domestic securities in May both in equites and debt, according to NSDL data.
“Foreign funds have dried up in the backdrop of a strong dollar and exits across asset classes from emerging markets,” said Sandeep Bagla, associate director at Trust Capital Services India. “FPIs have sold debt securities in India due to surging crude oil prices, US Treasury yields, higher domestic inflation and tight market liquidity.”
Bagla added that the “movement of the dollar against other currencies will be key to deciding future investments in emerging markets.”
In the past one month, the dollar index, which measures the unit against other currencies, rose 2.57%.
The local currency, which Tuesday ended at 67.87 to the dollar, has lost 0.65 percent against the US currency, and was among the worst performers among emerging market units.
During the month, the benchmark US Treasury yield shot up as high as 3.1%, although it has since eased to trade at 2.88% now. Back home, India benchmark yields has been rising pulling prices down.
Crude oil prices touched a high of $80 a barrel two weeks ago, denting investor confidence on emerging markets, particularly those that are net importers of energy. India meets three-fourths of its oil needs from overseas shipments.
“Foreign portfolio investors are now seeking the safety of dollar-backed assets,” said Ajay Manglunia, EVP & Head fixed income markets, at Edelweiss Financial Services. “Unless the global scenario stabilizes, investors may not be keen on emerging markets, although India stands a fair chance of garnering a lions share of foreign investments, with improving macro fundamentals.”
The Federal Reserves expected rate increases are also weighing on investor decision-making as higher US rates would prompt global bond buyers to gravitate toward Wall Street.