MUMBAI Foreign investors are set for their biggest monthly purchases of Indian equities in four years in March, but analysts expect inflows to moderate after a major overhaul of tax rules kicks in on April 1.
Market participants estimate about one-third of the inflows of $3.6 billion seen this month - the biggest since February 2013 - were linked to buying ahead of the implementation of the General Anti-Avoidance Rules (GAAR).
The rules will make it harder to avoid domestic duties by routing investments through tax havens.
The magnitude of investment has surprised markets, helping the NSE index hit a record high on March 17. It is up about 10 percent so far this year.
But exporters have been hit badly as surging capital inflows sent the rupee to its strongest against the dollar since October 2015.
Analysts say they expect more muted investment flows for the rest of the year, saying India still remains appealing to foreign investors due to optimism about an improving economy and Prime Minister Narendra Modi's reform process.
"People would have intuitively accelerated the investments to avoid the provisions of GAAR," said Amit Jain, managing director of private equity firm GTI Capital.
Among steps GTI took was redeeming convertible debt to equity, since GAAR would make it harder to avoid capital gains taxes of 15 percent for investments held for less than a year.
Investors have also rushed to buy initial public offerings, while private equity investors have also accelerated their purchases, according to market participants.
Those accelerated investments helped add $1 billion to $1.5 billion in foreign investments to equities in March, said four traders who handle foreign trades. That would mean that without GAAR as a factor, inflows would have more likely matched the around $1.5 billion in equity purchases seen in February.
More muted foreign inflows in coming months would ease pressure on the rupee and exporters.
Software services provider Tata Consultancy Services and drug makers such as Sun Pharmaceutical Industries have sharply under-performed the NSE this month as a result of the stronger currency, which has appreciated nearly 5 percent so far in 2017.
But over the long-term India still remains a positive story for many investors, even with GAAR meaning higher taxes for foreign investors.
"India is a market we like," said Fabiana Fedeli, a senior portfolio manager at Robeco.
"The reforms that are happening there are unprecedented and we see these reforms as putting India on a completely different level to other emerging markets and versus its own history."
(Additional reporting by Sujata Rao-Coverley and Claire Milhench in LONDON; Editing by Rafael Nam and Kim Coghill)