The ongoing European crisis has shifted foreign institutional investors' interest from risky equity markets to relatively safer debt market instruments.
Since last month, Foreign Institutional Investors' (FIIs) have invested a huge chunk of their money in the debt market by way of government and corporate bonds and debentures, while their interest in equities has largely turned negative.
FIIs were gross buyers of debt worth Rs 19,376.30 crore in May this year, while they sold debt worth Rs 16,925.80 crore, thus becoming net buyers of Rs 2,450.60 crore of debt, as per data available with market regulator Sebi.
However, during the same period, FIIs were net sellers in the equity market, selling shares worth Rs 9,436.70 crore.
"Since the last two months, the euro has been falling and investors' money is shifting to both the dollar and gold. There is a huge amount of risk aversion in the market, due to which FIIs are shifting their hard-earned money to the debt market, which is considered a safer haven than equities during volatile times," SMC Global Vice-President Rajesh Jain said.
Due to the eurozone debt crisis, investors are hedging their euros by buying precious metals and dollars.
Following the global turmoil and the increasing uncertainty in the stock markets, foreign investors are trying to seek safety and higher returns by increasing their investments in the debt market.
However, to invest in debt market instruments like government or corporate bonds, FIIs have to seek permission from Sebi, which is not the case in equities.
The government has set a ceiling of $5 billion for investment in government securities and $15 billion for corporate bonds, which it is looking to raise, in order to improve the availability of funds in the system.
During the current year, foreign investors had invested a whopping Rs 27,050.9 crore in debt till May.
"There are two types of FIIs in the market - stable ones and the freaky ones. The stable ones are still buying stocks, while the freaky ones like hedge funds are creating the volatility in the market and are shifting their investments from the stock markets to the debt markets," CNI Research Chairman and Managing Director Kishore P Otswal said.
Meanwhile, the eurozone turbulence has led foreign investors to snap their three-month long investment streak in the Indian equity market and emerge as net sellers of shares worth over Rs 9,400 crore ($2 billion) in May.
Foreign institutional investors (FIIs) were gross buyers of stocks worth Rs 52,192 crore in May, while they sold shares worth Rs 61,628 crore, becoming net sellers of Rs 9,436 crore, data available with Sebi showed.