The runaway rise in the benchmark Sensex has finally prompted banking regulator Reserve Bank of India (RBI) to step in and restrict liquidity flow in the stock markets.RBI on Tuesday raised margins on advances against shares, public issues and guarantees and minimum cash requirements from 40 per cent to 50 per cent in an attempt to guard banks against excessive speculation in the capital market following the spurt in Sensex in recent weeks.Banks should raise the minimum cash margins to 25 per cent from the current requirement of 20 per cent, RBI said in a release. Bankers said RBI’s decision to hike margin is a step to insulate banking entities from adverse fallout of any crash in the stock markets. “This decision represents RBI’s ‘soft voice of concern’ on any excessive speculation in market,” said a senior banker.The benchmark Sensex had shot up by 45 per cent from its May level of 4,505. On Tuesday, the Sensex closed at an all-time high of 6,563.48. Since the second week of November when the index crossed the 6,000 level — for the second time this year — the Sensex has gained 9.4 per cent. Many stocks had hit their 52-week high levels.Banking sources said one Indian private bank and some foreign banks are aggressive in extending advances against shares. But all banks are well within the 5 per cent limit for exposure to capital market, sources said.In May 2004, margins for advances against shares, financing of IPOs and guarantees were reduced to 40 per cent from 50 per cent and the minimum cash margin from 25 per cent to 20 per cent, RBI added. This was done after the Sensex crashed after the elections in May.“The RBI has taken a timely action to regulate the use of bank credit for speculative forays into the stock market. This will be a check against diversion of bank funds to the market,” said a senior banker. Though there is no evidence of any massive fund flow from banks to the markets, market sources suspect there could be some diversion of bank funds.“It’s hard to believe that the ongoing rally is only due to inflows from foreign funds. Another surprising fact is that there’s no correction in the market even after the Sensex accumulated over 500 points in a month,” said a BSE dealer who preferred anonymity. Indian investors had a rough time during previous boom periods. In 1991, the market crashed after the surfacing of the Harshad Mehta-led scam. In 2000-01, stocks plunged after the scam involving Ketan Parekh broke out.
