After a 5,000-point rise in the last seven weeks, the Sensex witnessed a correction of 1,500 points in the last three days of the week gone by. While foreign investors pumped $9.2 billion into the Indian markets in seven weeks, the outflow in the first two days — Wednesday and Thursday — after the Securities and Exchange Board of India (Sebi) proposed curbs on Participatory Notes was only $410 million.

Though Cassandras have started proclaiming doom for the market and the economy, after Sebi’s proposal on PN and the correction that followed, the ground realities have hardly changed. A section of market participants claim that foreign investors are on a “Quit India” movement, but the fact is that FIIs remain bullish on Indian markets and the economy, and even predict exciting times ahead over the next three to four years.

Agreed, there could be pain in the short-term: the Sebi board meeting on October 25, could legalise the proposal to curtail the use of PNs, FIIs might withdraw a few billions in the next few days, and the Sensex could witness further correction. As Amar Ambani of India Infoline says, “Past experiences in Malaysia and Thailand reveal the futility of capital controls. These measures might still not be effective in giving support to the dollar vis-à-vis the rupee, but could potentially destabilise the market scenario, for the near term at least.”

But look beyond these near-term worries. “As their capital markets deepen and economies grow, China and India have developed a taste for stocks, something we will not see replicated on such a scale again in our professional lifetime. Instead of running from Asian stock markets at the first sign of trouble, foreign investors are likely to allocate even more money to them, making them more expensive in the process,” said Mark Matthews and Willie Chan, strategists at Merrill Lynch. This being a strong possibility, some foreign players are expecting the Indian currency to appreciate further.

... contd.