Since December, the foreign institutional investors have been net equity sellers to the tune of Rs 9,400 crore (Rs 94 billion) and in the same time, domestic funds have bought around Rs 7,000 crore (Rs 70 billion) worth of equity.
Obviously the fund purchases haven't been enough to balance off the FII outflows from the stock market, given that retail traders and operators have been bearish as well.
However it's interesting to note that the FIIs have not converted their profits into Euro and run for cover. On the contrary, they've parked something over Rs 8,400 crore (Rs 84 billion) in rupee debt across the same period.
That rebalancing is an interesting story in itself and one that hasn't got the attention it deserves from Dalal Street. To put it in perspective, the FIIs have invested more heavily in debt in the past three months than they had in the previous two years.
Consider the possible rationales for their action and its likely fallout. Rupee assets have delivered a premium of about 10 per cent to US dollar investors in the past year on the basis of currency appreciation alone.
Also, the differential between Indian interest rates and dollar interest rates has grown in the last three months as the US Fed has cut while the RBI has refused to do so.
As of now, this appears to be an absolute win-win situation for the USD investor. If the RBI maintains its current policy while the US economy continues to weaken, the return may well continue to be positive on both fronts for the USD investor.
If instead the RBI cuts rates to try and reduce the rate-differential and soften the rupee, then the FIIs can collect a windfall appreciation on their debt portfolio and book profits to head back into equities.
At the same time, if forex inflows remain positive (don't forget that FDI is also booming!) precisely because of the new-found enthusiasm for Indian debt, RBI will have a job-and-a-half preventing the rupee appreciating further.
There is a point at which the central bank will be forced to cut rates as the only credible way in which it can drag the rupee down.
In fact, the last three months have seen continuous speculation on this front from all sorts of players. There have been large flows out of domestic equity into debt in this hope alone.
The rupee investor doesn't have the cushion of a possible currency appreciation - he is taking a risk if he's invests in either short-term or medium-term debt and the RBI continues to hold its ground.
However, a rupee investor who enters long-term debt isn't taking much risk. There's lot of liquidity in the banking system, the rupee is appreciating and the credit-deposit ratio started dipping in Q3. Sooner rather than later, the RBI will cut. The fact that government banks have started cutting PLRs makes this appear imminent.
RBI's reluctance to ease rates is easily explained. Inflation is politically unacceptable in an election year. A cut by the RBI would definitely trigger cuts by every bank in the system and also by housing finance majors and other NBFCs.
That in turn, may set off inflation. If instead, it can persuade banks to lower commercial rates without lowering its own policy rates, it gets a better deal. Credit offtake will grow as commercial rates drop but with luck, inflation will remain under control.
What's actionable about this situation for retail investors? Well, debt funds holding long-term portfolios stand to gain quite substantially if they can wait for a rate cut. Entering the debt fund space could therefore, prove profitable. Banks and housing finance stocks could also deliver serious returns, as and when the cut does come through.
The latter possibility looks quite enticing because the Bank Nifty has dropped about 10 per cent since mid-January when it hit a record high. Banks have enjoyed a decent run, climbing over 70 per cent in the last calendar year.
The recent correction has knocked off some sheen from the sector. Valuations of many big banks are tempting - it is one sector where single-digit PEs and PBVs of 1:1 are still available.
Is this too long and speculative a chain of logic? I don't think so but we'll have to wait for the RBI to bite the bullet. It may take a while but bank prices cannot really travel much further South.