Sensex swings to Sebi’s new tune

Sensex swings to Sebi’s new tune

Mumbai: A day after India’s stock market regulator sought to dispel fears about the nature of curbs it will impose on foreign buyers of Indian shares later this week, the Bombay Stock Exchange’s (BSE) benchmark Sensex recorded its largest ever gain in a single day, up more than 878 points to close at 18,492.84.

The performance marked what has been an extremely volatile couple of weeks for the Sensex, which has soared to new heights only to fall dramatically after the Securities and Exchange Board of India, or Sebi, proposed on 16 October to curb certain instruments, known as participatory notes (PNs) that are used by overseas investors to buy into the Indian market relatively anonymously.

But on Monday, Sebi chairman M. Damodaran told foreign institutional investors (FIIs) that while Sebi plans to go ahead with its proposals, it would also look to ease entry barriers for new FII registrations and also allow proprietary sub-accounts to register as FIIs.



A key factor behind Tuesday’s rally is the change in the regulator’s tone, said Lalit Thakkar, director of equity research at Mumbai’s Angel Securities Ltd. “Sebi chairman’s talk to FIIs on Monday pacified investors," he said. “Most of the investors are now hopeful to get registered as an FII in India," he added.

However, some analysts said that they weren’t expecting such a surge.

“A 5% rally in a single trading session is certainly surprising," said Apurva Shah, head of research at Mumbai-based brokerage Prabhudas Lilladher Pvt. Ltd. “One can expect plenty of volatility in the short-term. Since new positions cannot be taken in the futures and options market, there will be a serious lack of liquidity in the market after derivatives expiry on 25 October."

That is also the day when Sebi has said that it will come up with the rules to deal with PNs, though a phase out could last almost two years.

Meanwhile, an individual investor from Karnataka, J.R. Narayana, filed a petition in the Supreme Court seeking to restrain Sebi from implementing proposals related to PNs. He cited the relatively small window that Sebi gave for getting comments on its proposals and claimed that small investors, such as himself, were thus prevented from making comments.

On Tuesday night, it was yet unclear what action the Supreme Court will take on the petition.

Meanwhile, the rupee closed at 39.60 against the dollar, up 0.74% against Monday’s level of 39.8950. Adding to the market sentiments, exporters also started selling dollars, making the benchmark currency cheaper against the rupee.

U. Venkatraman, head of treasury at IDBI Bank, predicted that the rupee will continue to appreciate against the dollar, but at a slower pace.

Foreign investors have helped drive a stock market boom in India, pumping in about $18 billion (about Rs72,880 crore) this year alone. Lehman Brothers has said PNs account for about 51% of foreign inflows.

Interestingly, the two largest constituents of the Indian capital market—FIIs and the domestic mutual funds (MFs)—kept a relatively low profile on Tuesday. While FIIs were net buyers of Rs390 crore worth of Indian equities, MFs were net buyers of just Rs37 crore, according to provisional data from BSE.

Ajay Bagga, the chief executive officer of Lotus India Asset Management Co. Pvt. Ltd, said that there was a huge amount of speculative trading on the Sensex. F&O (futures and options) trading volumes on the National Stock Exchange rose to Rs97,393 crore as against Rs71,454 crore on Monday.

Vineet Bhatnagar, managing director and chief executive of MF Global India, part of Man Group Plc., and Kaushal Sampat, chief operating officer of Dun & Bradstreet India, also expressed surprise at the extent of the market’s growth on Tuesday. “We expect positive impact in the mid-term, though there could be volatility during the transition phase in the mid-term. Many institutional investors who were investing through PNs will now get registered as FIIs. It will increase the buying in the market as netting will come down," said Bhatnagar.

Netting refers to the cancellation of two opposite positions (long and short).

Noted investor Rakesh Jhunjunwala sees Tuesday’s large movement as part of the same cycle of volatility prevailing for the past many weeks.

Vijay Bhambwani, CEO of Bhambwani Securities (Pvt.) Ltd, has an explanation for the wild swings. “This is known as the fifth wave, according to the Elliot Wave Theory. This is the final leg of a phase in the market, where volatility peaks. The phase began in May 2003, four-and-a-half years ago. It usually lasts for five years," Bhambwani said.

The Elliot Wave Theory is named after Ralph Nelson Elliott, who proposed that stock markets move in repetitive, wave-like patterns.

“Once this phase gets over, the volatility will settle down," Bhambwani added.

(Anup Roy of Mint, Salil Panchal of AFP, and PTI contributed to this story.)