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India: Equity market liberalization fails to excite

Opening for foreign investors will have only long-term effects; QFIs force for stability

Even a couple of years ago, India’s snap decision in January to permit foreigners to invest directly in the country’s stumbling stock markets would have made headlines around the world. Instead it was greeted with apathy. With India’s markets at multi-year lows and leading corporates weighed down by inflation, high interest rates, a weakened rupee and worrying dollar debts, the development passed most people by. Even India’s financial media, usually frothy with excitement over a hot stock or a regulatory sweetener, barely broke sweat.

Long-term benefits

Yet, analysts say, the ruling, finalized on January 15, might do much good in the longer term for India’s embattled bourses. It will permit qualified foreign investors (QFIs) to invest directly in Indian stocks – helping, in theory, to attract more foreign funds and higher-income retail investors, adding depth and breadth to the local markets.

Before the rule change only locally-born or non-resident Indians could buy domestic listed shares at the retail level. Non-Indians were restricted to buying shares via funds registered as ‘foreign institutional investors’.

These FIIs have in recent years become immensely, if unwittingly, powerful. Many see them as among the most powerful determining forces on India’s bourses – and even a de facto collective bellwether stock.