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Here comes the deglobalisation of Indian financial market

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Anshuman Tiwari
Anshuman TiwariFeb 10, 2018 | 14:37

Here comes the deglobalisation of Indian financial market

The meltdown in global markets coupled with post-Budget 2018 sell-off in Indian markets forced the country's stock exchanges to hit the deglobalisation button.

The three main exchanges - BSE, NSE and Metropolitan Stock Exchange of India (MSEI) - decided to halt trading of indices of Indian securities on foreign bourses with immediate effect. A joint press release by the three exchanges declared termination of entire data-sharing agreements with foreign exchanges and trading platforms across the globe.

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The move garbed in protecting business for Indian bourses is visibly aimed at preventing migration of liquidity (read capital flight) from India. The decision to suspend trading of Indian exchange derivatives in global markets within next six months (as per the conditions of agreements between the exchanges) will decouple Indian bourses from the global cues.

In the medium-term, this move may virtually end the run for Indian markets. The panicked isolation of stock exchanges will not go well with India’s global image as emerging destination of capital flows and ongoing globalisation of Indian financial products, that is, rupee or masala bonds.

Indian markets are one of the rare few (after the US and Europe) that allow trading their index-based derivatives (derivative is a financial contract that derives its value from an underlying asset like stocks, indexes, commodities etc) on foreign bourses across the globe. This has helped in growing trading volume in the Indian market and an increase in index trading business for Indian exchanges.

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The Indian derivative contracts are traded on SGX (Singapore), Chicago Mercantile Exchange, the Osaka Exchange, London, Hong Kong, Brazil, Johannesburg, Moscow, Korea and Dubai Gold and Commodities Exchange.

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The move is aimed at checking the sell-off by foreign portfolio investors, that is to say, leaders of Indian markets rally in the past three years. FPIs have sold shares worth Rs 3,665 crore in the past two sessions (Wednesday-Thursday) after investing Rs 13,000 crore in January before the Budget 2018.

The ban on Indian indices trading on foreign bourses doesn't augur well for India exchange-traded funds (ETFs), reportedly leading the ongoing FPI sell-off. ETFs investing in securities domiciled in India have attracted huge investment from across the globe owing to robust returns they provide.

Another reason behind this radical decoupling could be to stop FPIs from taking advantage of trading in Indian derivatives through foreign exchanges in order to avoid long-term capital gains tax in India.

The ban on trading of Indian indices on foreign bourses will be the end of the road for Singapore Nifty. The SGX Nifty attracts quite a large volume of Indian derivatives trading at the cost of NSE. The NSE has a licensing arrangement with SGX for dollar-denominated index futures linked to Nifty 50, Nifty Bank, IT, CPSE, Midcap 50 indices and Nifty 50 options.

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Interestingly, the Singapore Stock Exchange had planned to launch single-stock futures of Nifty 50 companies from this month.

The joint press release of Indian bourses observe that for various reasons, the volumes in derivative trading based on Indian securities, including indices have reached large proportions in some of the foreign jurisdictions.

The decision appears random, going by the press release, which suggests Indian exchanges have not completely closed the door for foreign trading of Indian indices. In future, they could create indices and licences for trading on foreign bourses.

The fact that the exchanges' announcement came on Friday (February 9) post-market hours, the impact of decision could be seen on the markets only on Monday. Market players are bound to seek clarifications from the SEBI on implementation of the move on the future trades already live in global markets.

The decision may spook the markets before it halts liquidity outflow. Markets could very well read the underlined panic of regulators amid ongoing global meltdown. As the implementation of India's global isolation will unfold in next six months, markets may witness a heavy unwinding of FPI positions as well as reduction in volume of trading.

Last updated: February 12, 2018 | 15:59
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