It was a knee-jerk reaction by investors on Wednesday morning to the market regulator SEBI’s proposals to regulate the issuance of Participatory Notes (PNs) and to keep a tab on foreign inflows through this route, announced after trading hours on Tuesday, that melted 1,744 points and 524 points on the Sensex and Nifty respectively.  However, the statement by Finance Minister P Chidambaram that there is no proposal to ban PNs to invest in India via the FII route helped the index recover after a one-hour trading halt. SEBI’s subsequent clarification suggesting that FIIs can write or renew PNs within an 18-month time limit boosted the sentiment on Dalal Street. Consequently, the market ended with a modest loss after an initial jolt.

No matter how strong the fundamentals of the economy are, the manner in which the market  moved with such furious pace, as is clear from the fact that the last 1,000-point sprint came in just four trading sessions, is a matter of concern. The finance minister too has pointed out that at the macro level nothing of significance has changed. 

When the fundamentals do not change so fast, what has motivated the stock market  to race past one milestone after another in the last few months at such a heady pace? Is this good only for those investors who have an appetite for risk taking, or does it augur well for long term investors too, as in the case of the latter, markets cannot be divorced from fundamentals? Even as the Sensex on Wednesday recovered most of the initial losses, there is no telling when and where the rally will be heading and ending.  All economic indicators suggest that India Inc. is heading for another year of sterling growth. The political uncertainty created by the recent controversy over the nuclear deal has ended and corporates may be offering substantial returns. This should augur well for long-term investors. But no one can say how long is the “long term” as the march of the country’s indices are defying all logic. Therefore the SEBI’s  move to moderate foreign inflows at present is a welcome decision and will help the markets in the long term by curbing the inflow of hot money.  Though critics argue that this is more of a government move to moderate inflows, the SEBI’s task is essentially to ensure the quality of papers and curbing the inflow. This apparently is the job of another regulator.