FPI inflows decline when the carry trade pauses

Foreign portfolio investor (FPI) inflows have been impacted by the halting of the dollar-to-rupee carry trade, according to analysts. Statistics indicate that in 2022, FPIs sold more than $16.5 billion worth of Indian shares, or $68 million per day. Including GQG investments in the Adani Group, FPI sales in 2023 to date total more than 22,651 crore. According to analysts, the selling is also linked to the collapse of the carry trade.

Carry trading is the practise of taking out a loan at a lower interest rate and investing the money at a higher rate in safe haven government securities (G­-Sec) treasuries. Interest rates were roughly 4.5% higher in India than in the U.S. for a considerable amount of time. In order to invest in G-Secs and stocks here, the FPIs borrowed there. This allowed the FPIs to benefit because G-­Secs could be used as margin for stock trading.

Nevertheless, since the U.S. interest rates began to increase over 18 months ago and are now at 4.5–4.75 percent, the carry trade has failed. India’s interest rates, which are now around 6%, have eliminated the spread it had previously.

Due to this, the FPIs have been compelled to start a significant unwinding of positions. According to Clearing Corporation data, just 7.47% of the $1.36 billion in long-term G-Sec positions have been used by FPIs. Only 24.78% of the 2.67 lakh crore limit for the general category was actually used.

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