Hot money fears

15 January 2005

Why did the RBI governor want a ceiling and tax on FII inflows? Uday Chatterjee explains.

As if a choppy market was not enough, it now appears that one arm of the market system does not know what the other arms are up to. Commenting on the recent massive intra-day fall of the Sensex, SEBI chairman G N Bajpai said that some 'unusual' price movements were observed in the markets.

Finance minister P Chidambaram, however, with his customary cool said that there was nothing unusual about the fall, which he said had been orderly. This would have surely had the ordinary investor wondering whether it was the SEBI chairman or the finance minister who knew better.

It happened again this week. Speaking at the release of the India Development Report of Indira Gandhi Institute of Development Research, Y V Reddy, the RBI governor had a few strong words about the quality and quantity of FII inflows. He suggested that it was time to consider ceilings and a tax on FII inflows.

All hell broke loose in the investor community for the next couple of hours till Chidambaram came on air to clarify that there was no proposal to cap or tax FII inflows. He added that he had spoken to Reddy and Reddy has been misunderstood.