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Foreign investors turned net buyers in July nearly after 10 months, with an investment of around Rs 4,989 crore in the Indian equity markets. This comes after heavy sell-off by these entities of around Rs 50,203 crore in June.

According to the NSDL data, investment of foreign investors in July month stood at Rs 4,989 crore, as compared to over Rs 50,000 crore outflow in June, Rs 39,993 crore outflow in May, and Rs 17,144 crore outflow in April.

"This reversal in FPI activity is one of the important factors driving the market rally in July. The steady decline in dollar index from above 109 to around 106.20 now has slowed down capital outflows from other markets to US. Good Q1 results from financials have resulted in increased demand for these stocks. Change is FPI strategy has led to short covering in financials and in too in recent days," said Dr V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Even as foreign investors were on the selling spree, domestic Institutional investors supported the market by remaining net buyers in equity. As per data compiled by Motilal Oswal Financial Services, domestic investors bought equity worth $1.33 billion in July and $5.97 billion in June.

The sell-off by these entities were attributed to the tightening of monetary policy by the US Federal Reserve, which is doing aggressively to combat multi-year high year inflation. Similarly, other central banks across the globe also following the same, including the Reserve Bank of India (RBI).

Inflation was the major concern for the central banks across the globe. In India, inflation hit more than 7 per cent which forced tje RBI to raise interest rate by 90 basis points to 4.90 per cent. Even now, inflation in India is sailing above the upper tolerance band of the central bank.

According to market participants, the recent SEBI decision to allowing foreign investors in commodity derivatives is likely to boost inflows.

On the other hand, sell-off by these entities put pressure on the rupee. India's foreign exchange reserves fell after and remained above $550 billion. But, in this week, rupee has appreciated fairly due to various overseas cues and firm domestic markets in three sessions.