The Indian government will lift previous restrictions, which prevented foreign investors from directly buying or selling any Indian equities, on January 15th in a bid to boost its capital inflows amidst a year of big losses on the benchmark Sensex.
“[We] decided to allow qualified foreign investors to directly invest in the Indian equity market in order to widen the class of investors, attract more foreign funds, and reduce market volatility,” said the Indian Finance Ministry in a statement cited by the Financial Times on Monday.
Previously, any foreign investor who wished to purchase Indian equities had to do so through indirect means such as mutual funds or institutional vehicles.
Though the latest move by the government appears to be a step in the right direction, many economists say that the January 15th change would have little immediate impact on the Indian economy, particularly after Indian equities were ranked among the world's worst performers in 2011.
By the end of 2011, the Sensex, India’s benchmark equity index, reported a record 25 percent drop-off in its value, with the rupee also losing about 16 percent this year against the US dollar – reaching a lifetime low of 54 rupees to the dollar.
“If the market is not very healthy, then the investors will worry, and I don't think it will happen so smoothly,” said Anushree Sinha, an economist at the National Council of Applied Economic Research, as cited by VOA News. "So I think we will have to put our house in order to get foreign investment."
"At a time when the foreign institutions are reducing their exposure to India, it would not be prudent to expect foreign individuals to start investing in our markets," added Jagannadham Thunuguntla, research head at brokerage SMC Global Securities, to Reuters.
Thunuguntla is optimistic though that “we can see some impact of this decision when the stock market conditions improve.”
On the other hand, left-leaning parties in India are concerned that opening stock markets to foreign investors could undermine the integrity of the financial system.
“The decision will open the floodgates for greater capital flow into India and undermine the stability and integrity of our financial system,” said Communist Party of India (Marxist) general secretary Prakash Karat to The Hindu.
Besides encouraging ‘fly-by-night operators' to take part in the markets, CPI’s parliamentary leader Gurudas Dasgupta also warned that the government’s latest decision could cause frequent convulsions in the stock markets because of inflow and outflow of overseas funds.
“The stock markets are on the decline and the situation is critical and the decision to allow individual foreign investors will not help,” he said.
India’s Finance Minister Pranab Murkherjee is adamant though that "the steps that the government is taking should hopefully help restore some confidence in the market.”
"It will integrate India with the global economy. Such flows would be more stable than foreign institutional investors," added Thomas Mathew, joint secretary in charge of capital markets in the finance ministry, to the Economic Times.