The stock is up on the stocks
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The stock is up on the stocks

Direct foreign investment in the market is a good sign, but the slide may continue.

india Updated: Jan 03, 2012 01:23 IST
Hindustan Times

The government’s New Year announcement that foreigners can buy Indian stocks directly, while signalling serious reformist intent, is unlikely to arrest the market decline immediately. The benchmark Sensex declined by a fourth in 2011 as foreign portfolio investors pulled out half a billion dollars from Indian bourses, a sharp turnaround from 2010 when they bought $30 billion worth of stocks.

Worries that a weak rupee, high inflation and back-breaking interest rates would add to the impact of the euro-zone debt crisis on company results caused the rout. These factors will influence the new category of foreign investors that now has access to the Indian market. Even with stocks a third cheaper in dollar terms than a year ago, India’s price-earnings ratios are quoting at an 8% premium over the US, according to data compiled by MSCI, an investment analytics firm. Goldman Sachs, the Wall Street investment bank that first spotted the BRICs opportunity in 2001, reckons growth rates in the emerging economies of Brazil, Russia, India and China peaked in the previous decade at four times the pace of the US.

As reform initiatives go, however, the move is welcome regardless of how effective it is in propping up Indian share prices. A wider class of investors should attract more foreign funds and reduce market volatility, as the government reasonably expects. India’s financial system needs deepening and allowing individual foreign investors to take up positions is a step in the right direction. So far, a foreigner wanting to invest in Indian equity had to route his money through funds that used accounts of registered institutional investors, a process the Indian government has not been entirely comfortable with. Since they started operating here, hedge funds have been required to register with the stock market regulator or operate as sub-accounts of foreign institutional investors, which ensured a modicum of monitoring. Now that dollars can flow directly into dematerialised equities, investments can be tracked better from the national security and money laundering perspective. Alongside a rash of tax treaties that attempt to keep tabs on rupees that originate in the country, flee and return as foreign investment, the greater disclosure involved in direct equity purchases tightens the net around unaccounted wealth.

A series of embarrassing reverses on reform initiatives by the UPA has raised legitimate concerns on whether the Congress has the stomach to straighten kinks in the Indian economy. The timing of the decision to widen the investor base of Indian bourses is a measure of the government’s resolve. Despite a stalled bill on pension overhaul, financial deregulation can be pushed through in bits and pieces simply because it does not evoke the mass hysteria designed to keep India’s labour immobile and its markets fragmented.

First Published: Jan 02, 2012 21:42 IST