Mixing red with green
After a manic Monday and a challenging Tuesday, woeful Wednesday brought a jolt to the stock markets. Key benchmark indices plunged by about 10 per cent to trigger a halt in trading before Finance Minister P Chidambaram stepped in to douse an apparent fire kindled by the Securities and Exchange Board of India (SEBI). SEBI had, in a late evening move on Tuesday, seemed to question the future of participatory notes (PNs) in India's markets. Mr Chidambaram said there was no plan to ban PNs, but also defended SEBI's suggestion in a discussion paper to phase out overseas derivative instruments, including PNs, as a step in the right direction.
Just what is going on? Simply put, what we have here is a mix of caution and optimism in an economy promising in its growth drive, but careful to avoid some of the costly mistakes other developing countries have made. PNs are actually pieces of paper used by anonymous overseas investors to play in the Indian markets through registered foreign institutional investors (FIIs), who act as their fronts. Both the anonymity and the volatility that can be triggered by the 'easy-come, easy-go' nature of such foreign money is a matter of concern to regulators and policy-makers. This should not be confused with either xenophobia over foreign investments or a return to pre-reform controls. The safety of small investors and a healthy climate in capital markets that finance development and growth are legitimate concerns for the government.
However, in mixing a healthy dose of red to the go-go green of the 'India story' engaging investors all around, the government needs to bear in mind that cautious amber signals are best given without triggering a sense of panic. This is a tightrope walk that involves separating issues of volatility from issues related to fair pricing of stocks. The dilemma is part of the growing-up pains of an economy that is trying to match the best regulatory practices of advanced economies while functioning in a diverse, politically sensitive society.