In a landmark move, the Indian government this week opened up channels of liquidity by allowing qualified foreign investors to directly invest in the Indian equity market.

In a landmark move, the Indian government this week opened up channels of liquidity by allowing qualified foreign investors to directly invest in the Indian equity market.

The move is in order to “widen the class of investors, attract more foreign funds, and reduce market volatility and to deepen the Indian capital market,” said a statement from the government’s press bureau.

India’s government has been gradually opening up access to its equity market and last year allowed QFIs direct access to Indian mutual funds. This week’s decision is the next logical step in the same direction, it said.

“Foreign capital inflows to India have significantly grown in importance over the years. These flows have been influenced by strong domestic fundamentals and buoyant yields reflecting robust corporate sector performance.”

While the move itself may not have a huge impact initially, Avinash Vazirani, manager of asset manager Jupiter's India Fund, believes that the boost in sentiment will mark an important long-term shift in investor confidence.

“The direct impact on foreign investment will be limited, partly due to tax registration requirements for participating investors, the government’s decision indicates a more investor-friendly stance and it is this that is likely to boost sentiment,” he said.

“Perhaps more significantly, in 2012 we have already seen the release of purchasing managers’ index data for December which, at a level of 54.2, indicates better-than-expected economic expansion. I believe that the fall in the equity index over 2011 (over 20 per cent in local currency) alongside the depreciation of the rupee (down 19 per cent against the US dollar over the year) currently leaves equity valuations at a very attractive entry point for investors," he said. 

Others agree that although more funds may flow, the greatest impact of the move will be felt in the message sent to global investors, than as a catalyst for change in itself. 

“This forthcoming change in regulation sends out a positive signal and is good news for the Indian equity landscape. It should help to broaden the shareholder base, attract a greater fund flow, reducing volatility and helping to strengthen the currency. Alongside the strong economic growth story, this recent trend of increased deregulation of both the Indian equity and fixed interest markets continues to act as a driver for renewed interest in the Indian capital markets.  These changes are well timed, further re-iterating India’s exciting investment opportunity," said David Cornell, managing director of asset manager Ocean Dial Advisors India.