While Sebi intends to keep the bears on leash with suitable margins on short sales, what about FIIs? Would they not sell for deliveries once the prices rise, and how would that affect the markets? More importantly, will foreign institutional investors (FIIs) resume buying?

These questions need urgent answers. There is much confusion on the investment scene today what with factors of politics, bear hammering, and FIIs selling, coupled with seemingly attractive stock prices. The investor needs to get a proper perspective now, more than ever before.

This week's column attempts to do this.

First the FIIs. There is a wrong impression that FIIs have started withdrawing from India post-Sinha's budget or the Pokharan tests. FIIs have been actually withdrawing from the Asian region as a whole for over 13 months now, due to the instability inthe region. For instance, Hong Kong and China have seen much more disinvestment by FIIs than India. Actually, India had continued to attract investments in 1997. The outflow started only in 1998, and has accentuated recently. The net outflow since the last three months has been of the order of $450 million, with May alone accounting for $218 million. The cumulative net investment has fallen to $8.84 billion. There are several reasons for FIIs withdrawal.

The prospects for the rupee sliding down has sharpened further now that India faces higher fiscal deficit, which would automatically favour a further depreciation in the rupee. There are other intangible factors as well. The BJP government has not been exactly inducing confidence into the FII investors. Take a look at their stance on economic issues. The BJP budget lacks any vision and courage of conviction. A case in point is roll-back of urea price hike.

The immaturity of political and economic governance is further revealed in several of itsmeasures - in its hopes that NRIs would substitute FIIs, that it can evade taking a firm stance against continuing subsidies, that FDIs will flow in automatically and in enough quantum to substitute portfolio investments.

It is not surprising that the FIIs would ponder over such tangible and intangible pressures over the Indian economy. First and foremost, they need to seriously consider their strategies to cope with not only the impact of the likely acceleration in rupee depreciation over their investments of over $8 billion, but the future attractiveness of Indian investments.

The exchange rate protection offered to new FII investments is unlikely to reverse the flow of portfolio investments immediately. On the other hand, a continued downside pressure on stock prices would force FIIs to craft their strategies carefully.

There are several shortcomings in the budget. The budget is inflationary and would end up rising interest rates, already in evidence now. Contrary to beliefs, we couldwell be entering a threshold region in terms of inflation response to money supply growth. The recent figures of inflation prove this. That could explain the disillusionment of FIIs over the Indian investment scenario.

The only thing that could change the investment stance is the slide in stock prices. Stock prices could become more attractive at lower levels. Well, it was the bears who realised this weakness of the market first and unleashed their fury. But, the result was beyond the expectations of many. Values slid down far more than what was warranted - including the adjustment for the changed economic scenario. This sets up a vicious cycle. With prospects of scrip prices diving further down, FIIs would naturally be tempted to wait some more before they start buying.

The ball is now in Sebi's court. Sebi needs to carefully weigh its options. It should neither allow an artificial rise in prices, which is out of tune with the reality of economic outlook. Nor should it allow the prices to be driven downout of proportion by the same logic. Willy nilly, Sebi will have to take on the role of deciding what the band the Sensex shouldbe allowed to oscillate. That would allow breathing time to allow FIIs to reconsider their stance.

And I see no wrong in this. New situations call for innovative solutions. Other countries have opted for banning FII sales. India has a better appreciation of FIIs role in the country. Right now, there is no way Sebi can do what the government needs to do in terms of restoring the investor's confidence. It can only hold the battleground temporarily, while the government gets its act together.

With the fundamental investment scenario not very encouraging, the government seriously needs to woo the domestic investor. And one sure way is to reduce the capital gains tax. As government own's disinvestment programme is involved the government might as well take quick action on this proposal.

Let the government realise this. Stock investments are risk investments. It is the government,which has increased the risk for the investor with its budget, and the unavoidable nuclear tests, in the short run. Therefore it is the government which needs to restore the risk-return parity for the domestic investor by reducing capital gains tax.

Let us remember that beyond a point you cannot woo the FII investor. Nor does it pay to give alien treatment to domestic investors.