Are P-notes falling out of favour with FPIs? Here’s what the data show

Participatory notes (P-notes), it appears, have fallen out of favour with foreign portfolio investors (FPIs) looking to take bets on the Indian capital markets, at least for now. 

Data made public by the Securities and Exchange Board of India (SEBI) show that after FPIs used the P-note route to invest a record Rs 1.02 lakh crore into the Indian capital markets in October. The figure for November came in at just Rs 94,826 crore. This was the lowest in five months since June, when Rs 92,261 crore had come in via this route. 

P-notes are financial instruments that foreign investors use to invest in Indian capital markets without having to register with SEBI.

The investment via P-notes in October was the highest since March 2018, when FPIs had pumped over Rs 1.06 lakh crore using this route, the stock market regulator’s data show.

Interestingly, inflows via the P-note route into the debt market in November, at Rs 9,605 crore, were actually the second-highest during 2021, below only September, which had seen debt inflows in excess of Rs 10,000 crore. 

The fact that the investments in the equity segment were constricted in November is evident since equity FPI inflows via the P-note route were down at Rs 84,915 crore in November from Rs 93,213 crore in the previous month. 

Having said that, although the figures for November are lower than those in October, they remain significantly better than in the first month of the year. In January 2021, FPIs had invested just Rs 84,976 crore via the P-notes, of which Rs 77,724 crore was in equity and Rs 6,574 crore in debt. 

But why are FPIs shying away from the Indian equity markets?

Analysts say FPIs are staying away from equity markets as they expect monetary tightening by central banks, high levels of inflation, higher valuations in equity markets and uncertainty around the spread of the Omicron variant of coronavirus.