Sunday 28 October 2007

Asphyxiating the hot economy!!!

First of all it has been a long time I’ve posted a blog, so might seem like a rusty touch, but the reason is just compelling enough to shrug off the rust & state what needs to be stated. The reason mentioned above is about the Indian economy & the Indian Capital Market; both of them are in such a booming stage that one cannot afford to miss it. That boom did not compel me to write on it but the recent peccadillo that the Finance Minister of India Mr. P. Chidambaram & our good old watchdog SEBI chief Mr. M. Damodaran created was the driving force for me.

Just a brief idea of that: there was an issue created out of nowhere that the Indian capital market was getting excessively high amount of dollar ($) flow that needs to be controlled. The solution for that so called fault was to make it compulsory for the FII (Foreign Institutional Investors) along with the Hedge Funds to register themselves with SEBI or get regulated from either India or the country of their origin; also to limit the Press Notes that were issued by these FIIs to the extent of 40% of their investments. Now the astonishing thing about this regulation is not the inexplicability of the clause but the reasons given by the persons responsible for it. The Finance Minister said that this was to control the flow of the capital that is flowing into Indian capital markets while at the same time the SEBI chief said that it was about disclosing the names & amount of anonymous investors into the market & to facilitate SEBI to keep a track of the money & it’s quality coming in. These two reasons are totally irrelevant to each other. The former one is about monetary policy of the country while the latter one speaks of mere the regulatory aspect of the capital markets.

If the former reason is held to be dominant then it is absolutely ridiculous one. The countries all over the world especially the emerging economies dream of such capital inflow into the system but our Finance Minister fears of it. While Chinese economy has been growing by more than average 10% p.a. for last decade our RBI (Reserve Bank of India) is afraid of the 9% growth we had for last 3 years & feel that our economy is overheating. The same tone seems to be voiced by the Finance Minister. If Chinese economy can do that & our economy can’t, then it just shows the incompetency of our monetary policy makers to manage things.

If the latter reason is taken to be true then first of all it seems to be too late for SEBI to check for the quality of the money coming in when the Sensex is already at the level of 19000. Also many analysts believe that there is no compliance problem with the FIIs & their issuance of P-Notes. Just they would need to get registered with SEBI which would not be too much of a problem. The real problem is with the Hedge Funds that are investing in India. The very fundamental of the working of the Hedge Funds is that they are totally independent of any regulations & perform under total freedom. The requirement asked by SEBI of the regulation of the fund will hurt them the most. Either they need to get regulated by SEBI or they need to pull out of Indian market. According to many analysts the amount each investor putting in would not be more than $10000 for each funds. Now is this unregulated amount too much for SEBI to handle? Then there is question of the competency level of SEBI officials also.

The fact is that the fundamentals of the Indian market are going to change with growth they are posting & with the prospects that are clearly visible. One of these fundamentals is the funds that are going to flow in & out of the market & Ministry of Finance & SEBI are just going to have to live with it & not make an attempt to fix things that don’t need fixing. Many analysts believe that all this fiasco is not going to reduce any flow of dollars coming in, instead they will only increase given the probable Fed rate cut in the offing on 30th Oct 2007 & yours truly is one of them.