SEBI should discourage speculative flows: FICCI-E&Y study

Market regulator Securities and Exchange Board of India (SEBI) needs to improve stability of foreign portfolio investment by discouraging speculative flows, suggested a FICCI-Ernst & Young (E&Y) study. "The domestic capital markets, particularly the equity markets, have shown dependency on the foreign portfolio flows. While the flows are on a rise, they have the potential of increasing volatility in the market. The regulators will need to take steps to improve stability of these flows and discourage speculative flows," a FICCI-E&Y paper on Capital Markets Sustaining Growth and the Challenges Ahead said, which was released here today. The focus of the regulatory guidelines should be on ensuring quality of investment flows in the country, the paper said, adding efforts should also be made to protect the interest of retail investors. The paper also suggested that the regulators should take steps to remove structural bottlenecks with a view to improve trading infrastructure and imparting greater transparency in capital markets. It further pointed out that ongoing sub-prime crisis in the US and rising oil prices can have adverse implications for domestic capital markets by putting pressure on exchange rate, interest rate and inflation. "The slowdown in the US may have an impact on the Indian exports as well as it could lead to capital flight due to increased profit booking and portfolio adjustment", the report warned.

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The FICCI-E&Y study suggested that the cycle time in the primary market needs to be reviewed and reduced to improving the functioning of the capital market. The paper also made a case for deepening of the debt market by improving regulation and encouraging participation of more players. The regulatory quality in India in global comparison as indicated by the World Governance Index still needs improvement, the study stressed. Pointing out that the capital markets are exhibiting strong fundamentals-led growth, the study said, "their sustained growth hinges on the ability of the market regulator." The paper said that market players would have to cope with five key challenges, which include political uncertainties till the general elections are over, pressure on the exchange rate, interest rates and inflation, rising oil prices, sub-prime crises, US slowdown and other global economic dynamics and protecting investors interests in the rapidly changing market dynamics. Commenting on the rising oil prices, the paper, India would need to deal address the problem by improving energy efficiency. Bio-fuels, it added, could be used as an effective substitute to oil though its prolonged usage might adversely impact the food prices and inflation. – www.economictimes.com