)
The increase in the size of foreign financial markets which allows trading based on domestic products, such as the rupee or the Nifty benchmark equity index, is creating 'policy problems', says the government's Economic Survey.
"A major development in recent years has been a new era of international competition. The two biggest markets in India are the rupee and Nifty. In both these, active trading has developed at foreign venues. Foreign customers have the choice of sending an order to India or elsewhere; households and firms in India are gradually finding ways of harnessing foreign choices. India has lost competitiveness in key markets," it says.
Global bourses such as the Singapore Exchange and Dubai Gold and Commodities Exchange are eating into the business of domestic stock exchanges such as the National Stock Exchange and the BSE. The Survey says total trading activity in the rupee is more than $50 billion a day, of which nearly 40 per cent now takes place abroad. The offshore over-the-counter market is even bigger than the onshore exchange-traded market.
And, more than half of the open interest (positions not settled) on the Nifty, an index of India's top 30 blue-chip stocks, is now abroad. "The foreign market has developed into a significant competitor...Ten years ago, the global market was practically absent in both these fields," the Survey says.
While the global competition has put pressure on Indian institutions and made these more efficient, this is creating difficulties for policymakers.
"The rise in market share of the foreign market is a major external impulse on the Indian financial system. The outlook for onshore trading is hampered by policy problems," it says.
The Survey has identified six drivers aiding global competition. Capital control and adverse tax treatment are key factors among these. Currently, the government prescribes a limit on the exposure a foreign investor can take. Also, the tax levied while trading domestically is higher than abroad. For instance, foreign exchanges don't levy a securities transaction tax, which makes it cheaper for participants to trade there.
Short duration of trading hours, technical mistakes in rules on position limits and margins, and bureaucratic and procedural overheads are some of the other factors the Survey highlights. "The domestic market is less well developed than some competing markets," it states.
