People's Democracy

On The Recent Turbulence In The Stock Markets

The Polit Bureau of the Communist Party of India (Marxist) issued the following statement on October 19, 2007

THE volatility being currently witnessed in the stock markets in India is a cause for serious concern. The CPI(M) has repeatedly urged upon the UPA government to reverse the capital account liberalisation measures initiated by the erstwhile NDA government and take concrete steps to reduce the vulnerability of the financial system to the flow of speculative capital, as was promised in the NCMP. The Reserve Bank of India (RBI) had also recommended the phasing out of the Participatory Notes (PNs), through which unregistered entities are pushing in huge funds into the capital markets and engaging in speculative activities. The finance ministry has been ignoring such advice.

The discussion paper released by the SEBI yesterday reflects the tentative attitude of the government in regulating financial entities, especially the FIIs. The SEBI proposals merely aim at reducing the proportion of non-transparent instruments like Overseas Derivative Instruments (PNs) in the total Assets under Custody of the FIIs. The recommendation of the Tarapore Committee of phasing out PNs altogether has not been accepted. The fact that even such a half-hearted measure by the SEBI has led to massive pull-out of funds precipitating a huge fall in the market only reflects the defiance of the FIIs towards regulatory institutions in India.

Financial entities that are unwilling to meet the disclosure norms should not be allowed to participate in the Indian capital markets. The UPA government should realise that the surge in FII inflows into India, encouraged by rupee appreciation and interest rate hikes, can eventually have serious adverse consequences. The financial markets across the world are already witnessing turmoil following the sub-prime mortgage crisis in the US, which has already spilled over to other advanced economies. Indian policy must move towards insulating the financial system from speculative finance capital. The CPI(M) is of the firm opinion that PNs should be prohibited, as has been recommended by the RBI.