With the BSE Sensex having crept above the 20,000 level briefly yesterday before closing at a tantalising 19,978, up 735 points on the eve of RBIs quarterly announcement of its credit policy, it is safe now to conclude that Sebis daring action on participatory notes (PNs) has been a success. The market regulator has managed to pull it off. This outcome can partly be attributed to Sebis sense of timing. It was results season already by the time the draft proposals were issued, and fears of a corporate performance downturn had receded. In fact, the Sensex was not only trading in the 19k zone, it was doing so at an interesting juncturewith customary talk of overstretched valuations that accompany such bull runs eclipsed by concerns about dollar inflows into the capital market. The operative word here is concerns, and it is only on rare occasions that stock market players widen the frame of their trading (rather than economic) analysis to include issues of capital inflows and its impact on monetary policy, the gradient of the exchange rate and prospects of further inflows. For resource allocation to be effective, a capital market should attract money for the prospects of business returns rather than exchange rate profits for foreign investors. Inflows ought not to become market determinants in themselves. With such macroeconomic concerns finding resonance far beyond the corridors of the RBI and government, the very use of the term capital controls was probably estimated to have lost much of its shock value. That it retained some potency as a scare was made manifest by the instant response in terms of a tumbling Sensex, but echoes of Thailands December 2006 debacle were quickly dispelled by the signals sent out to FIIs by Sebi.
The market regulator used its clever conference call to portray itself as a responsive regulator, making it clear that FIIs were welcome, even smoothening the path inwards for investors keen on participating on clear terms. That the PN clamps were made an issue of transparency was hardly a surprise, given that this was the basis of Sebis original objection to this investment instrument. Thus it is that the bulls are back and snorting. What remains unclear, however, is the extent to which investors worldwide have bought the arguments offered or indeed have reworked their strategies to satisfy new operating conditions.