Sebi’s front-door entry norm reins in copious inflows

The Government has managed to rein the ‘copious’ capital flows into the country’s stock markets.

The Government has managed to rein the ‘copious’ capital flows into the country’s stock markets. The Securities and Exchange Board of India’s (Sebi) curbs on participatory notes (P-Notes) have put a temporary halt on the huge foreign portfolio investments and the runaway bull rally.

After the market regulator proposed curbs on the P-Notes on October 16, portfolio investments have slowed down and resulted in an outflow of around $920 million in the last three weeks. But this measure — coming after the curbs on external commercial borrowings (ECBs) — had no impact on the rupee. The slowdown has come after the country witnessed a huge inflow of over $5.7 billion during the 15-day period before the ban on P-Notes (i.e. between October 1 and 16) and the Sensex took just four sessions for its 18,000-19,000 journey. While proposing the P-Notes ban, Finance Minister P Chidambaram had indicated that the curbs were aimed at ‘moderating copious FII inflows’.

According to Rohini Malkani, economist, Citigroup India, given the limited headroom available due to the 40 per cent limit, as well as the time it might take for the entities to get the FII registration, the measures (curbs on P-Notes) may significantly reduce near-term flows.

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In the coming 18 months, inflows can slow down or even turn negative for a few months, but any huge immediate outflows may not take place, said a note by Standard Chartered Bank.

However, what’s worrying the Reserve Bank of India (RBI) and the Government is that the rupee has not shown any significant correction. The currency has remained at the 39.32 level against the dollar last week. Though the Sensex bounced back after the initial knee-jerk reaction and crossed the 20,000 mark a week after the ban, the index is now down by nearly 1,300 points at 18,907.60. And the Muhurat trading on Friday, the Sensex dipped by steep 151 points for the first time on a Diwali day since 2000.

It’s not the ban on P-Notes — the route used by foreign institutional investors (FIIs) to drive up the Sensex — alone that tamed the bulls. The ongoing depressions in the global markets and credit woes have also contributed to the return of bears.

Meanwhile, official sources indicated that the Government is unlikely to put any curbs on investment through the private equity and real estate routes. “There were proposals from various quarters, including the RBI, to bring some checks on foreign fund flow to the realty sector, under the automatic route, as it’s fuelling asset prices and becoming a problem of plenty. But the situation is manageable now,” said a government source.

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“We’ve expressed our concerns. The Government has its policy parameters. Depending on the context, if something needs to be slowed down or paused, it will be considered,” RBI governor Y V Reddy said.

REALITY CHECK

• $920 mn outflows in 3 weeks after P-Notes ban

• Inflows of $5.7 bn in 2 weeks before the ban

• Rupee not impacted by slowdown in FII inflows

• Curbs on private equity, realty inflows unlikely

• Sensex drifting down, falls nearly 1,300 pts in Nov

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