Indian Stock Plunge a Yearly Call

by: TraderMark

Since my analyst team was lazy, they did not tell me about why Indian stocks were indeed down so much on Tuesday - I did not find out until about 7 PM. So I was in there buying Indian stocks in ignorant bliss. Apparently, the yearly call to restrict foreign investment reared its ugly head; and the Sensex plunged 9% on the open overnight, and then bounced back to close down only 1.8%.

I call it a "yearly call" because I believe this comes up every year in India, or at least as far back as I have followed the country. The stocks tank for a few days, the measure is shuffled off into the corner, and a great buying opportunity is created; however it stinks if you are in the stocks at the time it comes to the forefront. I don't want to discount the risk because if indeed this happened (one day) this would really hurt the demand/supply dynamic but again, this push seems to come up every year, only to fade into the woodwork.

  • Asia markets were pulled sharply into the red Wednesday, prompted by India, which plunged 9% on the open after regulators said they would limit trading in derivatives used by foreign investors. Trading was suspended for one hour to control the hemorrhage. The derivatives, known as participatory notes, allow foreign investors to trade anonymously in the Indian markets and have in large part accounted for gains of 55% on the Bombay Sensitive Index, or Sensex, since March this year.
  • "The market was down about 1,000 points this morning, but now it's only down 300 points, so it recovered very sharply from those levels, and it was largely foreign buying pushing it up," he said in the early afternoon. "That shows the level of [international] interest in the Indian stock market."
  • The lack of control India has over its foreign investment, and the subsequent bearish contagion effect felt in China, renewed concerns by some that the recent gains in Asia stocks reflect a bubble that could burst at any time. Sean Darby, head of strategy for Nomura Bank in Hong Kong, compared the scenario to the 1997 crisis in Thailand. "Thailand faced a similar situation in December 2006 and resorted to direct capital inflow controls on overseas portfolio money," he wrote in a note to the bank's clients today. "The punitive measures introduced for foreign investors were rescinded within 24 hours of being implemented."
  • Fortune also weighed in:
    • After the market close Tuesday, India’s securities regulator proposed closing off an avenue through which overseas investors have been buying Indian shares and bonds, a move analysts say could temporarily halt Indian equities’ recent stellar rise.
    • In a release posted on its Web site, the Securities and Exchange Board of India (SEBI) said it and the Reserve Bank of India were concerned by the year-on-year rise in issuance of so-called offshore derivative instruments. Offshore derivative instruments are financial vehicles used by foreign entities not registered with SEBI to invest in domestic securities. Foreign institutional investors that are authorized to invest in the country will buy securities and issue participatory notes to other foreign investors, who profit from dividends or capital gains. Regulators have in the past expressed fears such investments could lead to market volatility.
    • SEBI has proposed that foreign institutional investors and their sub-accounts not be allowed to issue or renew offshore derivative instruments. It also wants them to wind up their current positions over the next 18 months. At present, SEBI estimates about 34 foreign institutional investors issue ODIs. This number was 14 in March 2004.
    • Indian Finance Minister P. Chidambaram sought to calm the markets Wednesday, saying foreign investors were “welcome to invest in India, but for the present it is important to moderate these capital flows.” The government is not in favor of banning participatory notes, but it wants to cap them, he said. Registered foreign institutional investors can still invest in the market, the finance minister said. His comments are an affirmation that SEBI’s recommendations will likely be implemented this month.
    • “This was a problem waiting to happen. The economy was hurting because excess liquidity caused by foreign inflows had led to inflationary pressures and caused the rupee to appreciate,” said technical analyst Ashwini Gujral. After the initial knee-jerk reaction is over, foreign investors will continue to pump money into India because the fundamental growth story remains strong, he said.

    Ah, these young, idealistic capitalists. They still cling to the notion that regulators should have some teeth and make some decisive recommendations and have a say. They have not yet learned the true capitalist (American) way, of underfunding, understaffing, and essentially making regulating bodies impotent in lieu of 'free market capitalism' - you know the type - the type that leads to 'innovation' (such as the wonderful innovations we saw in the mortgage market in the past half decade!)

    I guess they have yet to reach the wonderful nirvana when political leaders are in the back pocket of corporations and hence weaken, and water down every responsible measure of regulation that would protect the 'common man' in lieu of the 'upper crust.' Well, we can only hope they adapt and advance over time to reach the heights we have reached here, where almost total lack of regulation creates a new "once in lifetime" crisis, like clockwork, every 6-7 years.

    And then after every crisis and major dislocation, institute regulations that were proposed Before the crisis (yet ignored or watered down since they are 'anti capitalism'), in reactionary mode - you know, reactive medicine, never preventative. And then we can all look around, point fingers and say "now how did that happen?". Now that's living!

    Disclosure: Long India stuff