Ever since the Fed rate cut on September 18, 2007, Foreign
Institutional Investors (FIIs) have consistently invested
in Indian stock markets. To check the increased surge of
this capital flow, the Indian capital market regulator authority,
Sebi showed its strong intent to introduce capital controls
and check capital inflows in the long run. It eventually
announced a ban on Participatory Notes (PNs) and mandated
registration of FIIs. The move is intended to influence
the FII sentiment and affect future inflows. However, it
is likely to impact more the short-term money flows and
not target long-term investors. This is also expected to
arrest abnormal appreciation in the rupee.Fed rate cut added fuel to the recent equity rally in India.
Sebi's ban on PNs instantly wiped out Rs. 4,72,000 cr in
market capitalization on the BSE. FIIs triggered the sell-off
and sold net equity worth Rs. 4,893 cr in cash segment of
BSE within a week after the regulation came into force.
Immediately after the regulation was mandated, three-fourths
of the regularly traded stocks reported a drop in their
market value. There was a historic intraday fall on the
BSE benchmark index sensex.
Markets reacted adversely to the move as it reduced the
leveraging benefits available through the PN route. Derivative
markets played an important role in raising the indices
as they offered huge leverage opportunity to investors at
a low cost. Some analysts opined that the Sebi's move was
negative and that FIIs would find the registration process
tedious. The sudden collapse in indices was equally shocking
for investors as much as their sharp rise in recent times.
Despite various computational models of analysis, markets
are ultimately led by sentiments driven by greed, fear and
hope.The concept of Participatory Notes (PNs) and off-shore
derivatives is of recent origin. The financial institutions
are selling customized derivatives on Indian equities in
their countries. They are willing to sell Nifty futures
and options in their countries. These firms in the process
are able to offset their positions due to counter-party
transactions. In case they are left with some portfolio
exposure, they enter into exchange-traded derivative market
to hedge their risk. This hedging necessarily takes place
in India.
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