Indian regulator sparks market chaos

The Indian stock exchange see-sawed spectacularly yesterday after regulators revealed plans to limit the flow of foreign money into Indian shares to avert the risk of the market overheating.

The proposed controls on offshore derivative instruments caused chaos on the Mumbai Stock Exchange with the benchmark Sensex index falling nearly 10 per cent within minutes of opening before trading was suspended. Palaniappan Chidambaram, India's Finance Minister, moved quickly to dispel "alarmist" fears that foreign investment in Indian companies was unwelcome, boosting investor confidence. Most of the lost ground was made up after trading resumed with the index closing less than 2 per cent lower.

The rollercoaster ride was not as spectacular as the near-17 per cent crash in May 2004 that followed the change in government, but it did end a staggering bull-run over the past few weeks which resulted in record highs in 18 of 19 trading sessions.

The latest turbulence was triggered by the announcement from The Securities & Exchange Board of India that it aimed to counter a surge in foreign investment in shares by tightening the regulations allowing hedge funds and other foreign institutions not registered with the Indian regulators to anonymously invest directly in one of the fastest growing markets in the world.

Foreign investors have poured around £8.3bn into Indian stocks this year – and $4.6bn (£2.3bn) this month alone – prompting concerns of an investment bubble. The rupee has gained over 12 per cent against the dollar over recent weeks.However Mr Chidambaram said regulators only want to moderate capital flows by encouraging foreign investors to register with the regulator.

Jeff Chowdhry, manager of F&C's Emerging Markets fund, said: "It remains very compelling, liquidity is abundant and many investors who have missed the rise in the market will want to buy."