The Hindu Business Line : Market moves

The Finance Minister, Mr P. Chidambaram, has quite rightly traced the source of market volatility to international capital flows even as he conceded their utility in domestic capital formation. Foreign institutional investors may have brought in over $50 billion in net investments. But the FIIs also bring with them an investment philosophy that requires them to constantly churn their portfolios as they build investment positions in the Indian stock market. Over the years, the extent of churn has only increased, as witness by the fact that just three years ago, the FIIs needed to turn their portfolio over by a mere three times to record a rupee of net investment in contrast to the situation in more recent times, where they turn portfolios twice as much.

It is easy to see that as the FIIs frequently buy and sell the stocks in their portfolios, not only do they cause gyrations in the prices of the securities concerned, but also the actions of other investors, who base their own investment decisions on expectations of FII behaviour. Not surprisingly then in March alone the daily returns in the stock market ranged from minus four per cent to one per cent. Contributing to the volatility across stock, currency and debt markets is also the behaviour of other domestic institutional investors such as mutual funds, `day-traders' — who buy and sell securities for a small price advantage in the same day — and banks, which take positions in the foreign exchange market based on their assessments of forex flows from FIIs.

The stock market, of course, is robust enough to withstand even severe shocks to the system without leading to a payment crisis — a feature that marked trading just a decade ago. But that does not mean nothing should be done to control it. Instant dissemination of information on actions of market participants and corporate performance is the recommended prescription, the world over. It certainly has the effect of eliminating uninformed trading driven by speculation or market gossip. Having established robust systems of trading, the Securities and Exchange Board of India must now focus on ways to enhance the scope and quality of information that is disseminated. For instance, SEBI puts out the data on FII investments with a two-day lag. In this day of electronic trading and identity of investors in real time, it should be possible to make the data available by the close of market hours if not on a continuous basis. Similarly, the information on business segment-wise corporate performance is in urgent need of reform. There have been instances of corporates clubbing patently disparate sets of businesses under one wholly spurious category thought up to hide relevant information to investors.

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