India calls for calm after market plunge

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Jo Johnson, FT Syndication Service
NEW DELHI: India's financial markets plummeted at the start of trading but pared their losses on Wednesday after the finance minister sought to clarify the stock exchange regulator's proposed moves to restrict foreign portfolio inflows of capital via offshore derivatives.
The stock market had only been open for three minutes before circuit triggers were breached, forcing the suspension of trading for one hour.
On Wednesday, the BSE Sensex, which had risen more than 50 per cent in the last 12 months, fell by 1,507 points, or 7.91 per cent, to 17,544.15, while the Nifty index plunged by 524.15 points, or 9.25 per cent, to 5143.90 before trading was suspended.
However, within minutes of the resumption of trading, the market began to trim its losses and by the close of trading the Sensex was down only 1.76 per cent to 18,715.82 and the Nifty down 1.92 per cent to 5,559.30.
The rupee, which has jumped by more than 10 per cent in the last six months, on Wednesday weakened by about 1.2 per cent to 39.8 to the dollar.
The market decline came after the Securities and Exchange Board of India on Tuesday night released a discussion paper proposing policy changes on offshore derivative instruments.
Markets began to make up lost ground after P. Chidambaram, India's finance minister, appeared on the steps of his ministry to appeal for calm in the market.
"There is no reason for alarm. This is a good decision by Sebi that will be in the long-term interests of investors and the capital markets," he said.
It is important to moderate capital inflows, which have been very copious. They have an impact on the rupee and also contribute to the steep and sharp rise in the market."
Mr Chidambaram said that the government's intention was to implement Sebi's proposals after less than a week of consultation.
Sebi's proposed restrictions on the issuance of participatory notes to offshore investors would effectively stop an important source of equity inflows.
Of the $17bn of foreign portfolio equity inflows this calendar year, close to $10bn is estimated to have been through P-notes.
Foreign investors such as hedge funds that are not registered with Sebi to invest in Indian equities are the principal users of participatory notes. The notes, which are linked to an underlying Indian security and sold by approved investment banks, enable such investors to gain exposure to Indian stocks.
Rajeev Malik of JPMorgan warned of a sizable moderation in portfolio inflows when these proposed policy changes are implemented."
Some individual stocks, among them Reliance Energy, were down by more than 15 per cent before trading was abruptly halted, but later recovered much of the fall.
Mr Chidambaram said India welcomed foreign investment, but said that investors in P-notes would be "invited" to register with the authorities.
Regulators have been concerned at the lack of transparency in surging flows of hot money into the Indian market in recent months.
The Reserve Bank of India has been highlighting the risk of a reversal in capital inflows for an economy running a large current account deficit.
Indian exporters, especially in the IT service sector, which bills mainly in US dollars, have been hit hard by the surge in the rupee's value against the US currency.
Capital inflows have increased dramatically over the past few weeks. Capital inflows over the trailing 12-month period increased to an all-time high of $75bn-$80bn in September compared with $27bn in the comparable prior period, according to Morgan Stanley.
The notional value of participatory notes outstanding in August 2007 was $89.8bn, up from $8.1bn in March 2004, according to JPMorgan Chase.
Sonal Varma, an economist at Lehman Brothers, said the measures likely would have a negative impact on the equity markets only in the short term.
However, the trend over the medium term will continue in the direction of capital account liberalisation," she said in a research note.