Taking Stock

CapitalIndian markets are speculated to experience some volatility in near future. The reason for this, according to Securities and Exchange Board of India Chairman M. Damodaran, is the increase in number of foreign investment in the Asian economies.

Certain categories of investors of mature markets seek Asian economies for investment for two reasons; the first being the high rate of growth of these economies that gives them a better return on their capital and the second being the stable performance of the stock markets here, which serves as a safe haven for their investment.

Speaking at a conference organised by the Asian Securities Analysts Federation here, Mr. Damodaran said, “There are certain categories of investors from the matured markets, where returns are not as good as in the past… So for greener pastures they have landed in our backyards because our markets give them good returns… They will abandon our markets if they [markets] don’t give them good returns… This will lead to volatility in our markets.”

Few months back, similar crises hit the Indian stock market when the sub prime rates in US hit an all time high. The result of such a chaos in the capital market there was that Indian stocks dipped significantly.

Undoubtedly, foreign investment is an important benefit for any developing economy, which needs capital that can be used to build infrastructure, the fact that these investments can be pulled out anytime, renders them less useful for the economy. For the same reason they are called “Hot Cash”.

Interesting to note here is that the global movement of capital has created such possibilities of unanticipated fluctuations in the capital market of India. Whereas globalization calls for a free movement of capital, it also makes the economy susceptible to changes in the rest of the world. If the Indian economy was more integrated with the world economy, the impact would have been more severe.

The recent inflow of foreign capital in India led to the strengthening of rupee against dollar, the value being the highest since 1988. This definitely is a signal of the rapid growth in the capital market of the country. The major challenge is to sustain the growth.

In the wake of the recent events, a need for a more regulated and organized capital market is felt. To hedge the market from such aberrations, it is necessary that damage control systems are put in place. Certain legal frameworks that take into account the working of Asian economies is the need of the hour.

Looking at long term solutions, Securities and Exchange Board of India is aiming at better investor education and law enforcement in the coming year.