The government and the financial sector regulatory agencies are examining and strengthening the settlement and clearing systems in various segments of the markets to ensure orderly functioning during stress times. The sharp surge in equity and currency markets in recent period has also given rise to ‘caution’ among the regulators regarding the challenges that could surface in case of sudden flight of capital.
Reserve Bank of India (RBI) Governor Shaktikanta Das, on August 21, warned that there is a clear disconnect between sharp surge in stock markets and the state of real economy, as surplus global liquidity is driving up asset prices across the world. He forecast that there will “definitely be a correction” in stock markets and the central bank is prepared to take all steps that are required to maintain financial stability.
While some regulatory and government officials, and market participants did not welcome Das’s direct comment anticipating correction in markets, sources said stress testing of the settlement and clearing systems are being undertaken to ensure that adequate liquidity is maintained in the markets and operations run smoothly in the event of “second order effects the Covid-19 pandemic on the financial sector.
Margin rules being worked on
Amid sharp surge in equity and currency markets, led by global liquidity, regulators are strengthening the margin rules for trading and short selling regulations to ensure that sudden correction in markets does not lead to financial stability. The focus is to ensure enough liquidity so that markets and operations run smoothly in the event of second-order effects of the Covid-19 pandemic on the financial sector.
“We are strengthening the margin rules for trading and short selling regulations, while at the same time keeping a watch on currency market developments,” a senior official said. Sudden spike in foreign portfolio investment (FPI) flows into equity market has led to expansion in foreign exchange reserves, leading to sharp appreciation in rupee in recent weeks.
In March, the Securities and Exchange Board of India (Sebi) had announced measures to control volatility in stocks such as curbs on short selling, increase in margins and reduction in market wide position limit for F&O stocks among others. While the measures were announced for a month on March 20, they have been extended by the markets regulator five times. On August 26, Sebi further extended the same and said the measures introduced on March 20, will continue to remain in force till September 24, 2020.
Earlier this month, the Monetary Policy Committee of the RBI in its meeting noted, “While markets and fundamentals seldom do a tango, a disconnect between the two carry the risks of disruptive market corrections”. The RBI Governor’s comment, however, failed to dent investor sentiment and enthusiasm and the benchmark Sensex at BSE rose by over 1,000 points or 2.7 per cent since Das cautioned about a correction in the market.
Market participants say that regulators should avoid making direct statement on market levels. The head of a leading mutual fund said, “Generally, central bankers make slightly ambiguous statements where people have to read between the lines, but this comes as a hammer.”
The CEO of a leading financial services firm also said that the RBI Governor’s comment on market level is not consistent with the practice adopted by governors in the past. “The RBI governor could have avoided making that statement on market levels. He could have made a comment at a level which was at the top, but if the RBI Governor starts making a public comment on market levels, that is not a good precedent,” he said.
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