All eyes on the Sensex

Restrictions on foreign investment through participatory notes (PNs) will come into effect on Thursday, marking an intensification of efforts by Delhi to moderate capital flows.

Eyes will be on the Bombay Stock Exchange, which exhibited volatility last week. It slumped by 9% on the news that a regulator had proposed limits on the use of PNs.

With economic growth rates among the highest in the world, India has retained its attractiveness to investors spooked by the liquidity crisis that shook markets earlier this year. But the surge in foreign investment and deeper integration with external markets have presented Delhi with problems: the rupee has appreciated by almost 12% against the dollar this year. In response, policymakers are considering changes to traditional forms of capital account management. This does not amount to acceleration towards full liberalisation, particularly given resistance to change from the central bank. Measures taken so far to stifle inflows have made little impact and further restrictions are possible.