Indian stock market

Has India not learnt a lesson from Thailand’s experience? Last December, the Thai authorities announced rules to limit capital inflows. When stock prices fell, they were forced to backtrack. Late on Tuesday, India’s stock market regulator proposed restricting the use of offshore participatory notes, known as PNs – an instrument much favoured by foreign investors. The stock market promptly fell 9 per cent yesterday, triggering a temporary halt to trading, although it closed just 2 per cent lower.

An immediate ban on the issuance of PNs linked to underlying stock derivatives is proposed, along with restrictions on the issuance of PNs in the cash market. Many positions will have to be unwound over the next 18 months. The notional value of PNs outstanding in August 2007 was $90bn, of which a third were linked to underlying derivatives. Since margins of only, say, 20 per cent will have been paid on the portion of PNs linked to derivatives, the potential outflows by April 2009 will look relatively small in the context of a stock market capitalised at more than $1,100bn. But the restrictions on future issuance could have a significant impact.