No short-term boost for Indian stocks from policy change

India`s move to allow foreign individuals to directly invest in its stock market is unlikely to boost the country`s sagging equity market in the short-term, the head of the Bombay Stock Exchange told CNBC Tuesday.

"We believe it (India`s decision) is very good in the medium and long-term...I wouldn`t worry about an impact in the next one week or one month...look at it as a structural change," Madhu Kannan, CEO of the Bombay Stock Exchange, said. Starting January 15, foreign nationals can directly invest in stocks listed on the Bombay Stock Exchange without using institutional vehicles like mutual funds. Kannan says the step to widen access to Indian stocks shouldn`t be viewed as a "one-off panacea" for the country`s equity market. "It is part of a long-term effort to make it easier for foreign institutions and foreign investors to participate directly in the market," he added. The decision, which was announced on January 1 2012, is the government`s most recent effort to liberalize the Indian economy and attract more foreign funds into the country. It follows a steep decline of almost 25 percent in the BSE benchmark Sensex last year. Parul Saini, Executive director at RBS Asia Securities, also says the move may not lead to "significant flows" in the near-term. "You can already invest in the marquee Indian stocks through ADRs, GDRs and mutual funds, it will take some time for people to feel comfortable investing directly," he said. Aadil Ebrahim, Managing Director of Bowen Capital Management, says the positive impact of this policy change will only become apparent once infrastructure associated with buying stocks overseas is put in place. "The rupee is not fully convertible like the renminbi. When Hong Kong had the first renminbi IPO, people had no idea how to get hold of the currency or how to buy the stock. I think we`re going to see the same thing here," said Ebrahim. He adds, "It will take some time, but they are moving in the right direction. My guess is it`s going to be haphazard, there will be a first step, second step, and maybe in a year`s time it may completely open up." Indian Stocks Expected to Rebound While the move to open up to foreign investors isn`t expected to give a major lift to stocks this year, Saini believes there are other factors that will lead to a rebound in Indian equities including attractive valuations, easing concerns over inflation and potential interest rate cuts. "Inflation could undershoot the Reserve Bank of India`s forecast and that opens up the room for the central bank to cut rates," he said, adding that interest rates could be slashed by up to 125 basis points this year. "As rates are cut, you will get some impetus to growth." Saini, who is bullish on Indian equity markets, sees a 25% return from MSCI India in 2012. He recommends gaining exposure to beaten-down interest rate sensitive stocks, and is currently overweight on Indian banks, which he says will benefit from possible rate cuts. Copyright 2011 cnbc.com