Participatory notes: Investment via P-notes declines to Rs 75,725-cr in July - What led to slump?

Participatory notes: Investment in the Indian capital markets through participatory notes declined to Rs 75,725 crore at the end of July, the lowest level in nearly two years, mainly in the wake of aggressive rate hikes by the US Fed.

This also marks the third consecutive monthly decline in investment numbers.

Participatory notes (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 75,725 crore at July-end compared to 20-month low of Rs 80,092 crore at June-end.

This was the lowest level since October 2020, when investment through the route was at Rs 78,686 crore.

Amar Ranu, Head-Investment Products & Advisory, Anand Rathi Shares & Stock Brokers, said the reduction in investment in capital markets via P-notes in the last few months is largely in line with the global outflows from emerging markets, including India.

As there had been constant fears of sharp rate hikes by the US Federal Reserve which led to the US 10-year bond yields surging, foreign investors are skeptical of investing into India.

"The risk-off sentiment in the wake of aggressive rate hikes from the US Fed is the primary reason for the decline in FII investment through participatory notes," Manish Jeloka, Co-head of Products & Solutions, Sanctum Wealth, said.

Of the total Rs 75,725 crore invested through the route till July 2022, Rs 66,050 crore was invested in equities, Rs 9,592 crore in debt, and Rs 82 crore in hybrid securities. In comparison, Rs 70,644 crore was invested in equities and Rs 9,355 crore in debt during June this year.

Meanwhile, FPIs turned net buyers for the first time in July, after nine straight months of massive net outflows, which started in October last year.

They had invested Rs 5,000 crore in equities last month following a massive net withdrawal of over Rs 50,000 crore in June. The positive momentum continued in August too as they pumped close to Rs 44,500 crore in equities.

According to Jeloka, the inflow bodes well for P-notes, which should pick up going forward, assuming the flows sustain. Largely, P-note participation in the capital market is directly correlated to participation by FPIs in the equity and debt market.

"Since inflation seems to have peaked out in India as reflective from lower inflation prints in last two months and the equity market is largely fairly valued, there may be a possibility that foreign investors will reverse their selling stance and subsequently, P-notes participation will also increase across equity assets in near future," Anand Rathi's Ranu said.