The Dollar-Rupee carry trade has come to a standstill impacting foreign portfolio investors (FPI) inflows, analysts said.

Data show FPIs sold more than $16.5 billion in Indian equities in 2022, which is $68 million daily outflows for the year. In 2023 so far, FPIs have sold more than ₹22,651 crore, excluding GQG investments into Adani Group. The selling is also due to collapse of the carry trade, analysts said. Borrowing money in a lower interest rate regime and investing in safe bet government securities (G-Sec) treasuries with higher rates is a carry trade. For a long time, interest rates in India were around 4.5 per cent higher than in the US. Hence, the FPIs borrowed there and invested here in G-Secs and equities. G-Sec here can be placed as margin for equity trading, which was a win-win for the FPIs. But since the US interest rates started rising nearly 18 months ago and currently stand at 4.5-4.75 per cent, the carry trade has collapsed.

India’s interest rates are at 6.5 per cent killing the spread it enjoyed. This has forced the FPIs to embark on a massive unwinding of positions. Clearing Corporation data shows FPIs had utilised only 7.47 per cent of the ₹1.36-lakh crore long term G-Sec positions. In the general category, only 24.78 per cent of the limit was utilised of the ₹2.67-lakh crore. According to a recent CRISIL Market Intelligence and Analytics report, “Tighter monetary policy abroad, especially in the US, points towards weaker FPI inflows. To be sure, global monetary policy – led by the US Fed – started turning tighter last year and is expected to remain so in 2023 as well. Past trends suggest that FPI flows remained buoyant during the US easing cycle (between 2008 and 2016), but became subdued during the tightening cycle (2016-19).” Hence, analysts believe the mad rush of FPI inflows will return only after carry trade turns positive.