Market may turn volatile

A cautious start is likely on the bourses today following RBI’s draft guidelines issued late on Friday which are aimed at restricting an individual’s capacity to borrow from banks to invest in share market.

Volatility may set in the near term following a substantial build up of positions in the derivatives segment over the past few days. Investors are likely to book profit following a sharp surge in share prices in the past few weeks. Sensex is up almost 43% for calendar year 2006 so far.

RBI has proposed tighter guidelines for banks’ capital market exposure. In a draft circular, the central bank has restricted banks’ lending to a single borrower for subscribing to IPOs to Rs 10 lakh. Advances other than IPOs to any borrower against security held in the physical and demat form have been restricted to Rs 10 lakh and Rs 20 lakh respectively.

RBI has also stipulated uniform margin of 50% on all financing of IPOs/issue of guarantees for capital market operations. The regulator has also proposed that banks limit their capital market exposure to 40 percent of their consolidated net worth at the end of each March, when the financial year ends. It proposed treating investments in venture capital funds as capital market exposure. However, banks with sound internal controls and robust risk management systems could seek permission for the limits to be relaxed, it said.

As per provisional figures, FIIs were net sellers to the tune of Rs 88.70 crore on Friday (17 November), the day when Sensex had lost 76 points.

Meanwhile, Prime Minister Manmohan Singh said on Friday the country needs to have moderate tax rates and a high level of compliance to ensure a stable economic environment that will encourage growth.

Asian stocks fell on Monday, drawing no benefit from a drop in the oil price towards $58 a barrel after weak US housing data fuelled worries about the health of the U.S. economy, Asia's top export market.

On Friday, the Dow Jones industrial average rose 36.74 points, or 0.30 percent, to finish at a record close of 12,342.56, which also marked its session high and a lifetime high. The Dow notched a sixth straight session of gains, its longest winning streak in a year. The Standard & Poor's 500 Index gained 1.44 points, or 0.10 percent, to end at 1,401.20. But the Nasdaq Composite Index slipped 3.20 points, or 0.13 percent, to close at 2,445.86