| Manmohan Singh with Sebi chief G. N. Bajpai in New Delhi on Thursday. Picture by Rajesh Kumar
Mumbai, Jan. 13: A swift denial from the finance minister on Y. V. Reddy's reported comments about capping FII flows helped markets stave off a widely-feared plunge today. Instead, it gave bourses the ballast for a rebound as the sensex ended with a 118-point gain at 6221.
After losing 500 points and shedding more than Rs 1,27,000 crore in market capitalisation since its new-year high, Dalal Street managed to win back Rs 37,000 crore.
Tech stocks were at the forefront of the rally, which was ignited by P. Chidambaram's comments that the idea of capping FII flows was never in the realm of feasibility. The exception was TCS, whose shares dropped even as it posted a healthy set of quarterly numbers.
The index opened at 6138.05 and hit an intra-day high of 6242.95 before ending at 6221. It has lost over 576 points ' from its lifetime high of 6679.20 on January 3 to 6102.74 on January 12 ' due to a cash pullout by hedge funds.
Reddy, delivering a prepared speech at the launch of a report on the economy, suggested taxing and capping FII flows. The words sank in late, but it would have triggered another stock crash when trading resumed today.
What helped avert the tempest was a finance minister who rushed in with a clarification and, perhaps, an order asking the RBI governor to clear the air.
Even Sebi stepped in tonight with a reaffirmation of what the finance minister said about FIIs. 'There is no proposal to restrict foreign funds in Indian stock markets. There is no reason to panic and FIIs are welcome to invest here,' Sebi chairman G. N Bajpai said.
Market operators are, however, scathing in their criticism of Reddy, who was described by one as 'a man from another century'. Some, most of them bankers, felt there was nothing amiss in what Reddy said. The RBI governor, like many central bankers worldwide, likes to throw ideas in the air for debate, to gauge their practicality ' though he may sometimes be clueless on the timing.
Apart from his academic credentials, Reddy is largely known also for his skill in communicating with the market. Treasury and forex dealers still recall the events in 1997, when the rupee was surging against the dollar. Reddy, then the RBI deputy governor, told foreign exchange dealers that the currency was overvalued in trade-weighted terms. His statement led to a 1 per cent rupee slide within a week. In 2001, when bond prices were rising on expectations of a rate cut, he said cheap money was not the solution to economic problems. His views led to a rise in the benchmark 10-year yield.
Wednesday's flip-flop might change all that. While bankers are not willing to say if the RBI chief has lost his way with words, they do concede that his comments could have led to a meltdown ' but for the damage-control drill.