Highlights Foreign investors pulled out $3 billion from capital markets in 2016

Overall net outflow has made 2016 the worst year for markets since 2008

Experts believe respite from sell-off is likely only in second half 2017

Foreign investors pulled out more than $3 billion of the so-called 'hot money' from the Indian capital markets in 2016, making it the worst period in last eight years in terms of foreign investments.Surprisingly, it is the debt instruments that have taken the biggest hit, after remaining a preferred investment avenue for foreign funds in recent years, while equities continued to attract net inflows but not enough to compensate the huge outflows from the bond market.Experts believe that any respite from such a sell-off is likely only in the second half of the new year 2017.Foreign Portfolio Investors (FPIs) have purchased stocks worth about Rs 20,566 crore in 2016, but sold bonds to the tune of more than Rs 43,646 crore, resulting in net outflows of Rs 23,080 ($3.2 billion), according to depositories data.The overall net outflow has made 2016 the worst year for Indian capital markets in terms of overseas investment since 2008, when FPIs had pulled out a massive Rs 41,215 crore in the wake of the global financial crisis.The inflationary tendencies on the back of rising bond yields in the developed world bond market coupled with a resilient recovery in crude have led to profit booking.Dollar strength and expectations of rate hike by the US Federal Reserve, the surprising US presidential outcome and the demonetisation drive, which created domestic cash crunch, sparked intense selling pressure in the capital markets, experts believe."Massive pullout of FPI investment, particularly in debt, happened during the last two months, particularly after the (Donald) Trump victory. This FPI pullout is an emerging market phenomenon, not an Indian phenomenon. The selling in debt is due to the market expectation of sustained Federal rate hikes starting December 2016," Geojit BNP Paribas' Chief Investment Strategist V K Vijayakumar said.Echoing similar views, Dinesh Rohira, CEO at 5nance.com, said: "Capital outflows started in Indian markets from October over the uncertainty of US election results. This event was soon followed by the demonetisation drive that created a domestic cash crunch and sparked intense selling pressure in the capital markets. This will result in slower production and domestic consumption at least for a quarter."Going into 2017, Pankaj Pandey, Head of Retail Research at ICICI Direct, believes that FPIs' allocation may remain tepid.

"We do not see a major turnaround for the next two quarters and so, the first half of 2017 will remain subdued in terms of foreign capital flow. The uncertainties are expected to settle down and reforms will start counting in for the economy in the second half of 2017, accelerating the growth momentum," Rohira said.