As the finance minister proclaimed candidly, perhaps too candidly for the comfort of SEBI, the P Note clampdown is aimed at moderating "copious" capital inflows.
This whole client anonymity business is an eyewash, the reason why the strongest opposition to P notes has always been from the RBI, not SEBI. So this ruse of nudging hedge funds and P Note investors to "register" as FIIs is about managing the rupee, not about creation of a more transparent capital market system.
Once this realisation sinks in, it becomes pointless to argue how SEBI could have done it differently. SEBI was not trying to do anything other than temper the deluge of money that was pouring into our market everyday, and that end was admirably served by virtually stopping new sub-account and P note money in. Thankfully, the unwinding pressure is deferred for 18 months on derivatives, the reason why the markets bounced back from yesterday's lows.
In the immediate near term, there does not seem to be much to worry about as enough time has been given to make the transition. Incremental flows will need to be watched carefully though, for signs of dwindling down on account of these new barriers. It will be interesting to see whether this speed breaker indeed triggers off a correction or the market manages to make fresh highs regardless.
Aside of the SEBI's poorly worded draft, which caused confusion yesterday morning, the bigger takeaway is the whole spectre of capital controls. The government seems to be panicking on the rupee.
Moves like the one on the P note are ill advised as they will probably only delay the inevitable, if that. Capital flows into India will continue, ECB and P Note type restrictions notwithstanding. The ECB norms came and went and the rupee went to 39.30 without even blinking. What all this merely does is to convey to the world the impression of confused and regressive policy action. It is one thing to try and usher in more transparency into the market with a well thought out transition mechanism, quite another to try and cut capital flows to protect the rupee through a badly drafted set of entry rules.
(The writer is Executive Editor, CNBC-TV 18)