Thursday nights big bang easing of foreign capitals entry into the Indian markets was overdue. The easing of the rules for registration as an FII means the number of such entities, currently at 1,328, will increase substantially. The Sebi (FIIs) (Amendment ) Regulations, 2008 allows a far more heterogenous group of entities, including sovereign wealth funds, into the markets than was possible so far. Its a no-brainer to predict that this will add substantially to the depth of the stock markets. The National Stock Exchange may be the fourth largest market in terms of turnover in the globe, but ranked by the presence of overseas entities, it still trails several Asian markets. That weakness will be now addressed. Allowing NRI entities access to the secondary markets againthere was a ban on this for almost eight yearswill also ease the flow of funds. Allowing sovereign wealth funds more freedom would seem to suggest that the governments earlier apprehensions have been allayed, although there isnt clarity on this. Of course, SWFs should be allowed. But India should also actively participate in the IMF-led effort to codify SWF rules of participation. Lets not forget, SWFs are government creatures with moneythey have a different DNA from private investors. Overall, the finance ministry and Sebi have accepted that the narrow definition of FIIs was yielding an arbitrage to registered entities without necessarily helping markets. The next step should be dismantling the definition regime altogether in favour of depository participants.
Changes announced in the debt market are less substantive. The maximum limit on bringing in dollars at one go has been raised to $50 million from the current $20 million. But remember, RBI had instituted an informal, flow-discouraging arrangement that can operate even now. ECBs are particularly crucial when high domestic lending rates squeeze borrowers. Big corporates can still cope, but the majority of businesses face the credit trouble. So, assuming that the higher ceiling rule is operational, small and medium enterprises (SMEs) will benefit the most. They pay a murderous premium on banks PLR, often as high as 400 basis points more. But in that context, the decision to cap the ECB rate ceiling at 200 plus Libor is not SME-friendly.