“I believe the steps taken are going to bring higher transparency and better financial discipline. This is important for ensuring stability in the Indian financial markets. I disagree that this move will have a dampening effect on capital flows into the country. In fact, this will only help increase capital flows due to better transparency and financial stability,” said Dun & Bradstreet president and CEO Manoj Vaish.

That said, there may be some short-term churning and unwinding as foreign funds will have to exit their PN positions in stocks. There may be a small decline in interest in initial public offers (IPOs) as a sizeable chunk of qualified institutional buyer (QIB) applications used to come through PNs.

“Over the long term, the improved transparency will be positive for the health of the market.... If these measures are followed by rapid FII registration, they would improve disclosure and transparency within the market, which would be welcome,” said Citigroup India economist Rohini Malkani. However, Malkani added that given the limited headroom available due to the 40 per cent limit, as well as the time it might take for the entities to get the FII registration, the measures may reduce near-term flows significantly.

In the coming 18 months, according to a note issued by Standard Chartered Bank, inflows may slow down or even turn negative for a few months, but any huge immediate outflows are unlikely to take place. So far, foreign investors have not headed for the exit door.

... contd.