India's Record Stock Rally May End on Capital Curbs, CLSA Says

India's record stock market rally may falter if the government slaps controls on overseas buying in an attempt to stem gains in the rupee, CLSA Ltd. said.

``Strong capital controls could cause a big decline,'' Christopher Wood, CLSA's Hong Kong-based chief Asian equity strategist, said in an interview yesterday in Gurgaon, near New Delhi, where CLSA is holding its 10th investor conference. ``The central bank may contemplate more measures. That's the biggest risk to Indian markets now.''

Proposals to curb offshore derivatives triggered a slump in markets that halted trading on Oct. 17 and ended eight straight weeks of gains by the Bombay Stock Exchange Sensitive Index. Overseas investors resumed purchases after the regulator's final rules didn't impose additional curbs. They've bought a record $18.7 billion of Indian stocks this year.

The Sensex topped 20,000 for the first time last month, the third-best performing stock market in Asia this year after China and Bangladesh. The rupee, driven by the overseas flows, has advanced 12.7 percent this year, the second-best performance by an Asian currency after the Philippine peso.

The Securities & Exchange Board of India, the market regulator, on Oct. 25 scrapped some offshore investments to persuade foreign investors to register in India. Finance Minister Palaniappan Chidambaram said on Nov. 12 there are no plans to impose further controls on capital flows.

Meets With Accident

Wood said Asian markets could decline if any large financial institution ``meets with an accident'' due to the U.S. subprime- mortgage crisis that has already prompted the departures of chief executives at New York-based Citigroup Inc. and Merrill Lynch & Co.

The world's largest securities firms and banks have announced more than $40 billion of losses from writedowns of collateralized-debt obligations and other debt backed by mortgages to people with poor credit.

Given that there are chances of the U.S. falling into recession, industries such as technology, which depend on North America for most of their revenue, could suffer if the world's biggest economy slowed, Wood said.

Still, India's economy has become more broad-based, he said.

``The Indian domestic economy has moved beyond the software sector,'' Wood said, referring to the creation of jobs and the generation of income by industries such as housing and retail.

India remains an economy driven by domestic demand and current investments by companies will continue for ``many years'' sustaining an economic growth of between 9 percent and 10 percent, Wood said.

The Indian economy will expand by almost 9 percent in the fiscal year ending March 31, Chidambaram said Nov. 5. Gross domestic product has grown an average 8.6 percent since 2004, the fastest pace since independence in 1947.
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