As the rupee dropped out of the sky in June, foreign institutional investors (FII) parachuted out of the debt market, withdrawing $5.6 billion. This was the highest ever withdrawal in the market’s history.

A weak rupee affects the returns earned by FIIs. The exit meant net FII investment in the Indian debt market turned negative in the first half of calendar 2013, with outflows of $1.8 billion.

Equity Market Pullout

In the first five months, FIIs had pumped in $3.9 billion. The net inflow in calendar 2012 was $5.9 billion.

The exit was not restricted to debt. FIIs also pulled out $1.8 billion from the equity market in June. Their net investment in equities, however, remained positive at $13.5 billion.

Thanks to this, the BSE benchmark Sensex remained relatively unscathed by the turbulence compared to other global indices. As of July 1, the Sensex was trading at the same level it was at on January 1.

This is not the first time that India’s debt market is seeing FII money go out. A similar situation was seen in 2009, when foreign institutional investors pulled out $1.2 billion. That year, the Sensex rallied 76 per cent, from around 9,900 points to 17,400.

Markets worldwide have been battered by the US Federal Reserve’s announcement that it will taper its quantitative easing strategy, which has served its purpose.

Indian investors fear that foreign inflows into the market will be hit if the US stimulus comes to an end. As of June 28, cumulative FII investment in India’s debt market stood at $31.7 billion, while the equity exposure was $139.5 billion.

A total of 1,753 FIIs are registered with market regulator SEBI for transacting in the country’s market, with the number of registered sub-accounts pegged at 6,404.

>arvind.jayaram@thehindu.co.in

comment COMMENT NOW