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Wednesday, October 17, 2007

SEBI proposes to stem PN money entry in India

" Securities and Exchange Board of India proposal to tighten the rules for purchase of shares and bonds in Indian companies through the participatory notes.
At present there are 34 nos. (14 in Mar'04) FIIs / Sub-accounts issue ODIs."

The SEBI move was long overdue and it is in the interest of the country that the RBI, SEBI and the Finance Ministry acts in coordination, rather than serving their own briefs and ignoring the bigger picture.

Comments against the move suggest that India was blessed with the capital inflow which many an economies would have given anything to secure. Hence, it is not in the interest to stop the inflow and rather, one should welcome it. Such a move, may well end in shooing away the investor projecting India as being too arrogant.

Well, taking one at a time:

India was blessed with the capital inflow …it is not in the interest to stop the inflow and rather, one should welcome it.”

In an economy, there is an intrinsic value of the total assets, services and the future earning capacities of the same. This is what is the worth or the wealth of the nation. The most similar thing can be the EV of the nation, which takes into account the value of the current assets as well as the PV of Future cash flows. Lets call it EV(n). this value is represented by the amount of money floating in the economy, represented by M3. Let this money’s value be called as M(n).

Hence the value EV(n) is represented by M(n), tied together by a constant factor, say “k”. This k is, in layman terms, the indicator of the currency in the country.

Or, EV(n) = k * M(n)

When the central bank goes on printing money, it distorts the picture by increasing the M(n) while the EV(n) remains the same. Hence the k changes and hence the value of currency changes (as a result, addition or erosion in the purchasing power of the currency resulting into inflation/ deflation or Foreign exchange appreciation/depreciation).

What is happening in India is that, with trying to suppress the Re, RBI has been purchasing the dollar. This has resuted in high forex reserves, which have to be kept out of the system for the fear of disturbing the equilibrium, in other words, sterilizing the flow by CRR, SLR and hikes.

Hence, in order to keep doing what it is doing, RBI doesn’t want any foreign money seeping into the system. Now, we all know that India is a re-rating story. Hence, the foreign appreciation(read capital) has put all Indian asset classes on their historical levels. In other words, the Mcap of the country has risen.

In effect the EV(n) rises. With this rise, there is not corresponding rise in the, say the gold reserves, the earnings etc. Hence, the M(n) remains the same.

Hence the k or the currency value is under pressure to appreciate further.

This is the very last thing RBI/Fin Min and the exporters want., i.e. an appreciating Rupee. Hence the ban (or regulation, if you choose to call it that)

“Such a move, may well end in shooing away the investor projecting India as being too arrogant.”

No investor was doling out any largesse when thy chose to invest in India. They had little option to do otherwise.

As long as the economy is viewed by those in the Govt., as a collective effort of a nation to achieve prosperity via human enterprise, we shall continue to do well. Maybe not as the white hot thing as of today, but surely a safe and sound investment.

Perceiving economy from the prism of the stock markets would be detrimental. It is the latter which is the result and not the cause.

Crux of the matter:

In the long run, this move should bring in more positives than negatives for the economy. And, what is good for the economy should be good enough for the markets as well.

Maybe, the CRR hike, which was looking imminent, may be delayed for the time being.

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