Investment in the Indian capital markets through participatory notes (P-notes) dropped to Rs 86,706 crore till May-end from the preceding month, while experts say foreign investors will reverse their selling stance and return to the country's equities in the coming 1-2 quarters.

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P-notes are issued by registered Foreign Portfolio Investors (FPIs) to overseas investors who wish to be a part of the Indian stock market without registering themselves directly.

They, however, need to go through a due diligence process.

According to Securities and Exchange Board of India (Sebi) data, the value of P-note investments in Indian markets -- equity, debt, and hybrid securities -- stood at Rs 86,706 crore at May-end compared to Rs 90,580 crore at April-end.

In March, the investment was at Rs 87,979 crore. It was Rs 89,143 crore in February and Rs 87,989 crore in January.

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Of the total Rs 86,706 crore invested through the route till May 2022, Rs 77,402 crore was invested in equities, Rs 9,209 crore in debt, and Rs 101 crore in hybrid securities.

In comparison, Rs 81,571 crore was invested in equities and Rs 8,889 crore in debt during April.

"In terms of ODI (offshore derivative instruments) in equity and debt, we have reached back to the levels of December 2020.

"However, if we look forward from here, most of the pain is factored in with the increase in 10-year bond yields, and equity markets showing significant drawdown," said Divam Sharma, founder at Green Portfolio, a portfolio management service provider.

There is still an uncertainty around inflation levels and the US Federal Bank's actions. Besides, currency correction has happened to a large extent.

"Equity markets are offering some attractive valuations at these levels and the supply chain, and inflation issues should begin to subside over the coming months. Markets usually move ahead of the economic cycle and we believe that over the coming 1-2 quarters, we should see FPIs coming back to allocating capital towards Indian equities," he added.

In line with decline in P-notes investment, the assets under the custody of FPIs dropped by 5 per cent Rs 48.23 lakh crore at May-end from Rs 50.74 lakh crore at April-end.

Sharma attributed a large part of this reduction to the market correction in equity and debt portfolios.

Meanwhile, foreign investors withdrew nearly Rs 40,000 crore from Indian equities and Rs 5,505 crore from the debt markets last month on fears of an aggressive rate hike by the US Fed that haunted such investors and dented sentiments.

This was the eighth consecutive month of net pullout by FPIs from equities.