SEBI removes curbs on P-Notes ,RBI cuts CRR by 50 bps

Alert:Wall Street tumbles; Dow falls below 10000
------------------------------------------------
SEBI removes curbs on P-Notes
Sebi lifts curbs on P-Notes
P-note norms revised; no cap in ODIs
SEBI removes restrictions on P-Notes

ET:
The Securities and Exchange Board of India on Monday did a U-turn by doing away with the restrictions on issue of participatory notes by fore
ign institutional investors against securities, including derivatives, as underlying.
The move seems aimed at reversing the foreign fund outflows in recent times due to the credit crisis in the US and spread to Europe. The decision, as SEBI chief CB Bhave put it, was in view of the current market conditions. Bombay Stock Exchange’s today closed below the 12,000 mark. The 30-share index shed 724.62 points or 5.78 per cent to close at 11,801.70, but off the low of 11,732.97. National Stock Exchange’s 50-share Nifty settled at 3602.35, sharply down 215.95 points or 5.66 per cent from the previous day’s close. In October last year, the markets regulator had put a 40 per cent cap on FIIs’ total asset holding via participatory notes or overseas derivatives instruments and stopped them from issuing fresh P-notes or renewal of old ones. SEBI had given FIIs an 18-month deadline ending in March 2009 to do the needful. The moved was aimed to keep track of foreign flows into the country. However, the market regulator’s decision to scrap the restriction on P-notes holding can be debated in times when the world markets are faced with a liquidity crisis and plumbing lows. There could only be a short-term bounce back and a long-term benefit for the market, say marketmen. There could hardly be any major trend reversal in the market as FIIs are pulling out persistently from the emerging market like India, on the worries that most of the major economies heading towards recession following the liquidity crunch, said a senior official with a global investment firm. “However, the move is positive for long-term but in this environment we don't think any major positive change in the domestic market until and unless global crisis settles down.” According to Amitabh Chakraborty, president-equity, Religare Securities, “This should be a positive for the market, although majority of the FIIs are way below the 40% limit today, and hence sufficient headroom already exists for FII investment through the P-note route. FII eligibility criteria remain unchanged.” “We believe that a short term bounce back is likely, as the US is in an oversold zone and a sharp relief rally is possible there, but we remain cautious. While a short term spike of 10 to 15 percent in Sensex can't be ruled out, we are seeing market bottoming out at about 9000-10000, given our Sensex earnings estimates of 10-12% in FY2009 and historically market had bottomed out at about 9-10x forward earnings,” Chakraborty said of the markets. However, Anand Tandon, director of equities, Brics Securities, was sceptical about the SEBI move having any great impact on the markets, “One thing you need to understand that global situation is the dominant factor now. The impact of removing restrictions on overseas derivative instruments would be virtually a muted one considering the unprecedented global financial crisis. It seems to be pertinent move considering the current market situation, but I doubt that it would trigger massive inflows of FIIs. Though it signals of almost an ‘all-norms-relaxed’ move, the situation in the US is still gloomy and impact of which cannot be ruled out the domestic market movement,” Tandon said. The market’s fall from 21206.77 on Jan 10 this year started with trouble brewing in the US following defaults on home loans or the sub-prime crisis and spreading to financial institutions having exposure to this market. G Venkatramani, executive director, Nextgen Capital, said, “This could trigger a short-term recovery in the market but would not hold the downtrend for a long as the global markets are still wobbling with negative vibes though the domestic fundamentals are still sound.” According to Euromax Capital Services, “As the asset value has been falling sharply, this 40 per cent is really very less for the market. Thus, SEBI's move should be taken as a positive one, but a greater impact is less possible due to meagre liquidity in the system.”
SEBI revises P-note norms; lifts 40% cap in ODIs

Sebi revises P-note norms, scraps ODI restrictions

The Sebi Board met today in the backdrop of the global financial turbulence. The meeting took stock of the impact of the turbulence on the Indian capital markets and evolve suitable policy responses.
CB Bhave, Chairman, Securities and Exchange Board of India (SEBI), said norms on participatory notes have been revised and the limit on overseas-derivative instruments (ODIs) in both cash and derivates will be removed. “The 40% cap on assets under custody in cash market will be removed,” he said.
Earlier, in October 2007, the Sebi had banned fresh issue of P-Notes by FIIs. This was done to check the significant flow of foreign funds into the Indian stock markets. The excess liquidity was difficult for the financial market regulators to handle.

Here is a verbatim transcript of CB Bhave's address to media persons. Also see the accompanying video.

We had received a lot of feedback from various stakeholders. The Board considered all the views that had been received as well as the proposal that we had put up. It has been decided that the SME exchange can be either in the form of a new exchange, or an exchange trading platform of an existing exchange, and that there will be competition in this area. So, it is not going to be one exchange that would be licensed by us to be set up as an SME exchange.

The board also decided that the eligibility criteria would be made public by us. Then the exchange, which is newly setup for this purpose, or an exchange that is proposing to setup an existing exchange, which is proposing to set up a platform, can apply and Sebi will then consider those applications.

The board also considered the issue of norms that we have laid down for shareholding by individual shareholders in the demutualised stock exchanges. Again a discussion paper on this was put out by Sebi. As you are all aware the proposal in that discussion paper was to enhance this limit from 5% to 15% for some category of shareholders.

So, the board approved this limit from 5% to 15% for six categories i.e. public financial institutions, stock exchanges, depositories, clearing corporations, banks, and insurance companies.

It also discussed the issue of the entire framework that governs the participation in our markets by what we call FIIs, or foreign institutional investors. The board was of the view that the entire structure needs a comprehensive review. For this purpose, it was decided that we will put out a policy paper, which will be in the public domain for receiving comments from people.

The board also reviewed the decisions of October 2007 with regard to the offshore derivative instruments, or Participatory Notes as they are popularly called. It was decided at that time that these decisions would be subsequently reviewed on the basis of the data that we receive.

On the basis of this review, the board decided that the restrictions on ODIs on derivatives will be removed. Also, the restrictions on having only 40% ODI in the cash investments will also be removed. So, both restrictions that were put for offshore derivative instruments have been decided to be removed. They are no longer applicable.

The board in October 2007 had also decided that we will expedite the process of registering FIIs and sub-accounts so that people come and directly register here in the Indian market. It reviewed that position as well and it was reported to the board that during the last 11 months – October 31, 2007 till now – 397 FIIs and 1,160 sub-accounts have been registered. So, we found that that process is going on smoothly.

These were three important decisions that were taken in the meeting today.

===================================
RBI cuts cash reserve ratio by 50 basis points
CRR cut by 50 bps; Bankers don't see cheap loans soon
RBI cuts CRR by 0.5%
Industry hails CRR cut
RBI cuts CRR by 50 bps to 8.5%
RBI cuts CRR by 50 bps to 8.5%, effective October 11

MUMBAI: The Reserve Bank on Monday slashed by 0.50 per cent the rate of mandatory deposits that banks need to keep with it to ease the tight liquidity position, a move that may induce banks to lower commercial lending rates. The new Cash Reserve Ratio (CRR) of 8.5 per cent will be effective from October 11 and would unlock about Rs 20,000 crore into the banking system, RBI said. This is the first time in almost three years that the bank has relaxed its tight monetary policy stance that it had adopted to contain inflation. The move, which comes in the backdrop of inflation easing below 12 per cent and outflow of foreign capital, is aimed at infusing more funds in the financial system.

==================================
Other TOP stories:
FIIs shed equities worth Rs 2,051 cr
Mkts at 2-yr low: What are experts saying?
Rupee at 5-½ year low as shares slide
Crude oil prices tumble to 8-month low
Wall Street tumbles; Dow falls below 10000
Govt earned Rs 1,47,197 cr in I-T

London stocks slump 8.65%
Investor's wealth below Rs 40 trillion
Falling Re to pull down IT Q2
'Capitulation phase of bear mkt for '08 on'
Thermax bags Rs 450 cr order for captive power plant
D-Street meltdown: 162 stocks hit 52-week lows

SEBI does a U-turn on P-notes as market hits bottom
SEBI does U-turn on P-notes; move could trigger short-term bounce
BNP Paribas' 12-month Sensex target 9476
Nikkei falls to 4-year lows, economy worry hits hard
Brazilian stocks massacred, triggers two trading suspensions

RBI - our banks are ok !
Wall Street tumbles
Term - credit default swap
RBI cuts CRR by 50 basis points
Sebi removes curbs on P-notes
Rupee slides again / RIL, Reliance Capital, RPL October 2008 futures at...
Asian Markets Consolidate Losses As Financial Worr...
Post Session Commentary - Oct 6 2008
Bail-out approval fails to raise spirits
Market tumbles as global financial crisis spreads
Nervousness may continue

Stock Technical Levels
Daily News Roundup - Oct 6 2008
Mountains of worry! Weekly Technicals - Oct 6 2008
GAIL India Q2FY09 Fertlizer Preview
ULIPs vs Mutual Funds
Mahindra Holidays & Resorts files DRHP
Bajaj Hindustan India Utilities
Is India insulated ?


Source:ET,MC,BS,Sify,Rediff,Deadpresident blogs etc

Sensex plummets 725 pts on global weakness, Sensex at 2 year low

Sensex plummets 725 pts on global weakness

Indian market tanks over 5%

It was a long trip down south for benchmark indices Sensex and Nifty today as the bears thronged the ring at the opening bell and remained busy trampling down stocks cutting across sectors right till the end of the session.
Stockometer
The passage of the $700 billion bailout bill did nothing to lift the sentiment in global markets. The Wall Street had ended on a weak note last Friday after trading firm till the final hour. Asian markets went into a tailspin on doubts about the effectiveness of the bailout package in reviving the financial sector from the current turmoil. European markets crashed as well.
Top gainers
With the reporting season just a few sessions away and fears of heavy fall in revenues for the quarter ended September 2008 haunting the sentiment, investors appeared least inclined to pick up stocks today.
Worst losers
The Sensex crashed to 11,732.97, its lowest level in more than two years. It ended the day 11,801.70 with a massive loss of 724.62 points or 5.78%. The Nifty closed 5.66% or 215.95 points down at 3602.35. It touched a low of 3581.60.

BSE CD went down by 11%. The Realty and Metal indices tumbled 9.91% and 9.27% respectively. BSE CG and Power lost around 7.25%. Oil & Gas index ended 6.14% down. The IT and Teck eased by 5.82% and 5.62% respectively. BSE Healthcare, FMCG, Bankex, PSU and Auto lost 3.5% - 4.8%.

Midcap and smallcap stocks were slaughtered. BSE Midcap lost 7.13% and Smallcap ended lower by 6.92%. The market breadth was very weak right through the session. On BSE, only 281 stocks posted gains. 2369 stocks declined and 27 stocks ended flat.

Selling was so widespread that not even a single Sensex stock ended on a positive note today. Among Nifty stocks, Tata Communications (2.35%), BPCL (1.95%) and GAIL India (0.75%) bucked the weak trend and ended with gains.

Sterlite Industries (down 15.25%) was the biggest loser in the Sensex. Reliance Infrastructure (down 13.9%) was sold heavily in the final hour of trade. Jaiprakash Associates (down 13.55%) had another miserable outing. Tata Steel lost over 11%. DLF ended 10.3% down. Tata Power closed with a loss of 10.15%. Reliance Communications and Grasim Industries closed lower by 9.95% and 9.5% respectively. BHEL lost 7.45%.

Reliance Industries slipped by around 6.75%. Ranbaxy Laboratories lost 6.55%. Larsen & Toubro, Wipro, Satyam Computer Services, Tata Consultancy Services, HDFC Bank, HDFC, ITC, Infosys Technologies and Tata Motors lost 5% - 6.5%.

ACC, Bharti Airtel, Hindustan Unilever, ICICI Bank, Mahindra & Mahindra, Maruti Suzuki, ONGC and State Bank of India ended lower by 2% - 4.25%. Hindalco and NTPC also closed with sharp losses.

Suzlon Energy went down by 13.8%. Cairn India slipped by over 11%. Unitech, Reliance Petroleum, Ambuja Cements, Reliance Power, HCL Technologies, Nalco, Zee Entertainment, Idea Cellular, ABB, SAIL and Sun Pharmaceuticals lost 4% - 9%. Hero Honda, Siemens, Cipla and Power Grid Corporation also declined sharply.

Spice Telecom tumbled by over 30% today. Praj Industries, Aban Offshore, Chambal Fertilizers & Chemicals, Shriram Transport, GVK Power, JSW Steel, HDIL, Hindustan Construction Company, Century Textiles, Jindal Steel, India Bulls Financial Services, Phoenix Mills, IB Securities and Bombay Dyeing lost 13% - 20%.

Monnet Ispat, S Kumar's Nationwide, ICSA, Great Offshore, Sterlite Technologies, Gitanjali Gems, Shopper's Stop, Kansai Nero, Shree Precoated Steel, Prakash Industries, Madhucon Projects, Orbit Corporation and Motherson Sumi were some of the big losers in the midcap space.

-----------------------------------------------

Sensex @ 2-yr low

The Sensex opened with a negative gap of 242 points at 12,284 on the back of negative cues from the global markets. The NSE Nifty is down 216 points at 3,602.The US markets on Friday tumbled despite the House of Representatives clearing the $700 bn revised bailout package. As a result of which Asian markets were down 3-4% on an average at the opening bell.
Eventually, most of the asian markets like Hang Seng, Nikkei, Straits Times, Shanghai Composite and Seoul Composite indices ended with losses in the range of 4-6% each.
Bank home, the index too witnessed unabated sellling and tumbled below yet another psychological mark of 12,000, to a low of 11,733 - down 793 points from the previous close. The Sensex finally ended with a significant loss of 725 points (5.8%) at 11,802.
In the process, the index has shed 9.6% (1,254 points) in the last two trading sessions, and is down a whopping 41.8% (8,484 points) so far this year.
The BSE Realty index slumped almost 10% (330 points) to 3,000. The Metal index plunged 9.3% (780 points) to 7,636. The Capital Goods and Power indices tumbled over 7% each to 9,495 and 2,066, respectively.
The market breadth was extremely negative - out of 2,677 stocks traded, 2,369 declined, 281 advanced and 27 were unchanged on Monday.
BIG LOSERS...
Sterlite slumped over 15% to Rs 335. Reliance Infrastructure tumbled 14% to Rs 638, and Jaiprakash Associates [Get Quote] plunged 13.5% to Rs 100.
Tata Steel [Get Quote] crashed 11% to Rs 350. DLF, Tata Power [Get Quote] and Reliance Communications [Get Quote] dropped around 10% each to Rs 302, Rs 798 and Rs 300, respectively.
Grasim [Get Quote] shed 9.5% at Rs 1,591. BHEL crumbled 7.5% to Rs 1,449.
Reliance, Ranbaxy [Get Quote] and Larsen & Toubro slipped around 6.5% each to Rs 1,642, Rs 246 and Rs 1,083, respectively.
Wipro [Get Quote] and Satyam [Get Quote] dropped over 6% each to Rs 320 and Rs 294, respectively.
TCS [Get Quote], HDFC Bank [Get Quote], HDFC and ITC declined around 5.5% each to Rs 619, Rs 1,202, Rs 1,965 and Rs 180, respectively.
Infosys [Get Quote] and Tata Motors [Get Quote] were down over 5% each at Rs 1,318 and Rs 314, respectively.
MOST ACTIVE COUNTERS
Reliance topped the value chart with a turnover of Rs 381 crore followed by Reliance Capital [Get Quote] (Rs 244 crore), Axis Bank (Rs 141 crore), ICICI Bank [Get Quote] (Rs 119 crore) and Tata Steel (Rs 117.70 crore).
Debutant 20 Microns led the volume chart with trades of around 1.30 crore shares followed by IFCI (1.06 crore), Reliance Natural Resources [Get Quote] (1.04 crore), Reliance Petroleum [Get Quote] (71 lakh) and Jaiprakash Associates (59 lakh).

Source:ET,Sify

Week Ahead: Another test of support at 3,800

Week Ahead: Another test of support at 3,800

If the market closes below 3,715, it could lose another 200 points landing between 3,500-3,550.

A pattern of crash, recovery and another crash saw the Nifty back at 3,818 points for a week-on-week loss of 4.19 per cent. The Sensex eased to 12,526 points for a loss of 4.39 per cent. The Defty was down 5.19 per cent with the rupee diving below the 47 mark.

Volumes were low and declines outnumbered advances by a hefty margin. The FIIs were massive sellers which contributed to pressure on the rupee. Indian institutions were token buyers. The Nifty Junior lost 4.47 per cent while the Midcaps 50 lost 5.33 per cent and the BSE 500 lost 4.78 per cent. Incidentally both Sensex and Nifty hit respective 52-week lows of 12,153 and 3,715.

Outlook: Prospects are bearish. But it’s possible that support at the current levels will hold. If so, the Nifty will range-trade between 3,715-4,150. If the market closes below 3,715, it could lose another 200 points landing between 3,500-3,550.

Rationale: The new lows confirmed an intermediate downtrend is in force. The breach of support at 3,800 on intra-day basis also suggests that sellers are becoming more powerful than buyers at that level. This makes it likely the market will make a downside breakout with a target projected to 3,500.

Counter-view: The intermediate downtrend has been in force since mid-July when the market hit a peak of 4,650. Since then, it’s been lower highs and lower lows. After six weeks, the downwards momentum may ease, though this is unlikely in a long-term bear market. If the market does trade up but it will run into resistance between 4,000-4,150. A serious recovery is most likely closer to settlement when short covering would be present.

Bulls & bears: Metals were among the worst performing sectors in a week when around 1,000 stocks touched their respective 52-week lows. Tata Steel, Sterlite, Sail, Nalco, Jindal and Hindalco all did badly. Banks saw wild swings after ICICI was the target of rumours of bankruptcy and other bank stocks also saw selling followed by recovery. The Bank Nifty eventually lost just 0.6 per cent.

FMCG majors like HUL, ITC and Colgate held their ground. Pharma stocks such as Dr Reddy’s, Sun Pharma and Lupin did well and even Ranbaxy looked to have bottomed. Real estate and other rate sensitive stocks such as automobiles, financial institutions and NBFCs generally lost ground.

However two-wheelers like TVS and Hero Honda did much better than four wheelers. The IT industry continues to suffer from fears of US recession and the CNX IT lost 3.3 per cent. The trader’s choices next week vary from shorts, to stocks that may be bottoming, to the odd defensive holding.

Hind Unilever
Current Price: Rs 256.7
Target Price: Rs 265

---

Despite a reduction in trading volumes, HUL has held its price gains in a weak market. It may have completed a breakout when it closed above Rs 255. The stock has a potential upside till Rs 265 and a downside till around the Rs 245 levels. Keep a stop at Rs 250 and go long.

ICICI Bank
Current Price: Rs 504.35
Target Price: Rs 550

---

The stock saw amazing gyrations between a low of Rs 460 and a high of Rs 565 as it generated high volumes. It has support close to the current price and is most likely to settle into range trading between Rs 500 and Rs 560. Keep a stop at Rs 495 and go long, intending to book profits above Rs 545. If Rs 495 is broken, the next support is Rs 480.

Lupin
Current Price: Rs 770.2Target Price: Rs 810

---

The stock has made an upwards breakout on a volume expansion. It faces resistance between Rs 770 - Rs 780 and it has a possible upside till the Rs 810 levels. Keep a stop at Rs 760 and go long. Be prepared to wait up to 10 sessions while it traverses Rs 770 - Rs 780.

Tata Steel
Current Price: Rs 393
Target Price: Rs 380

---

The stock has made a downside breakout on heavy volumes. It has a target projection of Rs 380 and this may be exceeded due to high volume. However, any pullback is likely to lead to a bounce till the Rs 420 levels so, there are risks involved in going short. Keep a stop at Rs 400 and go short. Book partial profits at Rs 380. If the Rs 400 stop is broken, go long with a target of Rs 420 and a stop at Rs 395.

TVS Motor
Current Price: Rs 35.65
Target Price: Rs 42
The stock is testing resistance at Rs 36 and if it closes above Rs 36.5, it is likely to have a target of Rs 42. Volumes have been on the high side, which is a good sign in a breakout situation. Keep a stop at Rs 34.5 and go long. Increase the position between Rs 36.5 and Rs 37.5.
-----------------------------------------------
INVESTOR GUIDE frm ET

Bank, energy stocks ease blow for MFs6 Oct, 2008, 0549 hrs IST
NAVs of actively managed diversified stock funds slumped in September, but most of them outperformed the benchmark stock index, cushioned by cash and a softer fall in bank and energy stocks.

The bear grip tightens 6 Oct, 2008, 0546 hrs IST, Deepak Mohoni
The indices remain in the intermediate downtrend which started from the BSE Sensitive Index’s September 8 high of 15,107.

Pressure continuously mounting on Nifty 6 Oct, 2008, 0543 hrs IST, Shakti Shankar Patra
The pillar on which the five-year bull market was built - something that had come to the Nifty’s rescue even during the current crisis - is now busted.

Hedge, private equity funds head for the rocks 6 Oct, 2008, 0534 hrs IST
Forced deleveraging and potential global recession mean the whole range of alternative investments, including real estate and commodities, are very vulnerable.

Hindalco's rights issue: A good investment opportunity 6 Oct, 2008, 0528 hrs IST, Santanu Mishra
Strong fundamentals and a good offer price make Hindalco’s rights issue a good investment opportunity. But if its share price falls well below the offer price, investors will be better off buying the stock from the open market

Even dividend can generate better returns 6 Oct, 2008, 0525 hrs IST, Karan Sehgal
Investing in select stocks from a purely dividend point of view can generate better returns in the long run than investing in the seemingly high interest-paying fixed deposits

Ipca Labs contemplates huge expansion plans 6 Oct, 2008, 0518 hrs IST, Kiran Kabtta
Ipca Labs has an integrated business model with huge expansion plans. Investors can consider the stock based on its growth & value prospects

Good time to begin systematic investing 6 Oct, 2008, 0513 hrs IST
It is too early to make positive predictions about the tsunami that has hit global financial markets. But as things get back to normal slowly, the surroundings will change for the better. This is a good time to begin systematic investing.

Slowing economy may offer respite to retail sector 6 Oct, 2008, 0507 hrs IST, Supriya Verma Mishra
A slowing economy may offer some respite to the domestic retail sector. Falling rentals now provide a glimmer of hope to players who are on an expansion overdrive and experimenting with new formats

The grim scenario of Rupee 6 Oct, 2008, 0500 hrs IST, Ramkrishna Kashelkar
From moving in a fairly stable range over the past three years, the rupee suddenly finds itself swerving around in a rather rocky terrain.

Source: Economic Times, Business standard.

SEBI may ease PN curbs to pep up Dalal St

SEBI may ease PN curbs to pep up Dalal St

The government and financial regulators are set to ease some of the restrictions imposed on foreign portfolio investors last year. The move is part of an effort to bolster capital inflows which have been slowing down lately, according to persons familiar with the matter. Capital market regulator the Securities & Exchange Board of India (SEBI) is likely to discuss a proposal to this effect at its board meeting on Monday.

Foreign institutional investors (FII), who were barred from holding more than 40% of their assets in participatory notes (PNs), could be given some flexibility on this count in the backdrop of the changed scenario in the domestic financial market. The 18-month deadline — ending in March 2009 — to unwind certain PN positions is also likely to figure at the meeting, sources close to the development said. In October 2007, Sebi had placed a ban on either fresh issuance or renewal of PNs by foreign portfolio investors or their sub-accounts in cases where the underlying Indian securities were derivatives. These investors were then directed to wind up their current position over 18 months. It was also decided then to cap the percentage of PNs or offshore derivative instruments (ODIs) outstanding at 40% of the total assets under custody of a registered foreign portfolio investor. One option could be to extend the March 2009 deadline for winding up of positions in cases where PNs have been issued with derivatives as the underlying. A more rigorous know your client (KYC) norm may also be imposed to address concerns relating to money laundering and terrorism financing, if the proposal to ease the current restrictions goes through. With the seizure of credit markets abroad and the attendant squeeze on liquidity , capital inflows into India, be it in the form of portfolio inflows, foreign borrowings or private and venture capital, has been hit over the past few months. Foreign institutional investors (FIIs) have so far taken out close to $10 billion, while foreign borrowings have aggregated close to $10 billion so far compared to net borrowings of $22 billion during the last fiscal. Foreign direct investment (FDI) flows though have been robust at over $10 billion in the first quarter of this fiscal. Sceptics say impact of PN rules change limited However, given the assessment of significantly lower inflows over the next couple of quarters, the government, Sebi and RBI are considering whether to ease the October 2007 restrictions imposed on FIIs in the form of a ban on issuance of ODIs or PNs as they are popularly known, a person close to the development said. ODIs or PNs are derivatives issued against an underlying Indian security, which could be shares or derivatives, by foreign portfolio investors registered in India to overseas investors who are not registered here or seek to trade anonymously.


At that time, the government had defended the move, saying it was aimed at moderating inflows . Large inflows put pressure on monetary policy managem
ent in terms of containing growth of money supply (created through release of rupee funds into the system for mopping up of dollars) and the risk of higher inflation.

“The scenario has changed now. We need to weigh global factors and attract inflows,” said a person associated with the review exercise. Even in October 2007, the finance minister had said that there was no move to completely ban PNs and that the restrictions were to moderate inflows. He had said that the move was in the interests of all categories of investors. However, in the past, RBI had made it clear its discomfort on the issue of PNs and when inflows soared to over $10 billion in September 2007, sought a ban on fresh or incremental issuance of PNs. RBI’s concern also related to the identity of the beneficiary of this instrument.

The central bank has consistently been sceptical about PNs compared to Sebi and the finance ministry. After the ban came into force, the share of PNs in total portfolio inflows is reckoned to have fallen from over 51% in August 2007 to almost half. Since January 2008, the Indian market has fallen in line with global trends. Morgan Stanley estimates that capital inflows have declined to $30-35 billion during April-August 2008 compared with $108 billion in the fiscal year 2008. There are enough sceptics who feel that tweaking the rules now may not have much of an impact in the short term. Their reasoning is that given the redemptions being faced by many hedge funds and the fact that some of the biggest issuers of PNs — such as Merrill Lynch — themselves are in trouble, the impact of a change in policy could be quite limited. But there are others who counter this by saying that the growth story is still attractive.

Coupled with this is the fact that the market is perceived as well-regulated. The data collected after imposing restrictions on PNs would be placed before the board on Monday. Though, the board had held some discussions on the matter at its last meeting also, it wanted to deliberate more on the issue before taking a decision.

Policymakers are of the view that capital flows should be eased to take some pressure off the rupee which has been slipping against the dollar. The finance ministry has already eased some restrictions that were imposed on external commercial borrowings last year in order to increase capital flows into India as well as address the fund requirement of the corporate sector. Sources in the government also said more measures that could boost capital flows into the country could be considered.

Source:ET