The great thing about hindsight is that it gives you the chance to reflect and figure out where one went wrong in the assumptions,
about what one had expected about the future that has now become a present, which is quite different from the future one had
presented in the first place. Got that? Well, to put it simply many analysts were telling us that the Indian stock market would
benefit as Wall Street fell and other emerging markets collapsed under the weight of questionable investments (in hindsight, of
course). India was supposedly de-linked from the global capital cycle and there would be a flight to quality when other global
markets began to show their weakness.
Well, the recent actions of the FIIs suggest that they are not keen on buying Indian quality shares when their home markets are
not looking strong. India is, whether we like it or not, linked to the global capital cycles. In 1996 and 1997, the world was awash in
liquidity and the FIIs were willing to take a gamble that the Indian markets would get over the political uncertainties. And they
have not made much money on that bet. Now, ironically, just as the Indian economy is showing signs of recovery and the politics is
beginning to get the lowest level of indecency, the FIIs are net sellers of Indian shares.
And by the looks of it, they are not as welcome as one thought they were. Recent comments suggest that the FIIs have too much
say in the direction of the market and it is being suggested that there holding should be reduced from 30% to 20% with no more
than a 5% equity holding in any single company by any one FII. On a different subject, someone is also selling the Indian currency
and buying US Dollars. That someone may be Indian corporates, multinationals, or FIIs. And of course, officials of the Reserve
Bank of India are "warning" that market forces must only define a trend but not the final value of the Indian currency.
Amidst all this noise of liberalisation and creation of option markets and capital account convertibility, we have regulators and
officials sending signals of "controls". Unfortunately, the markets do not work that way. If, after having allowed FIIs to buy 30%
of shares, you scale back the limit to 20%, there will be a flood of panic selling as every FII worries about what will happen to that
extra 10%. Will the government of India and UTI buy those extra 10% shares at today's prices? If the trend of the Indian rupee is
southward can the RBI defend any market rate with its paltry US$ 28 billion in reserves? My guess is that if the RBI even tries to
defend the trend in a free-trading currency, they will sharpen the fall of the currency. Look what happened to any of the South
East Asian central banks that tried to defend their currencies.
In hindsight, there are many things that India has done wrong. And we should learn lessons from them and take corrective action
that does not result in panic. If one believes that the Indian markets are dominated by FIIs, then create conditions for the Indian
investor to go in with full force and counter the FII power. Indian investors have invested over US$ 15 billion each year in primary
markets just three years ago. Today they invest nothing. Why? Because they believe that the regulators and the stock exchanges
are unable to protect them from fraud. If we are concerned about the "rapidness" of the fall in the exchange rate of the currency,
maybe we should not have encouraged loose talk like a 4% or 6% corrective action in the currency is necessary. Maybe the
change of the central bank governor is being interpreted as a shift from an era of protecting capital flows to protecting exports.
Capital flows are encouraged by stable currencies, while exports are theoretically helped by weaker currencies.
One of the things that one can change, though, is the GDR market. The policy decision to allow Indian companies to issue GDRs
was correct. The decision to have them traded outside India is stupid. This GDR market hurts the FIIs because they are punished
by 10% spreads, low volumes, and no transparency. It also weakens the Indian broking community. Maybe there should be a
change in laws to accommodate foreign trading of these GDRs on the Indian stock exchanges. We all make mistakes and we will
continue to do so because economy-building is not a perfect science but a series of trial and errors. But the one thing that we
should learn is to rectify our errors without creating panics.