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India tightens regulations to limit virus-led market volatility

MUMBAI (Reuters) - India’s market regulator on Friday halved position limits for certain stock futures, restricted short-selling of index derivatives and raised margin rates for some shares in a bid to curb “abnormally high” volatility amid the coronavirus pandemic.

A man walks past a screen displaying news of markets update inside the Bombay Stock Exchange (BSE) building in Mumbai, India, February 6, 2018. REUTERS/Danish Siddiqui/Files

The measures by the Securities and Exchange Board of India (SEBI) come after markets around the globe have plummeted over the past week as emptying hotels and airports and closure of malls and offices threatened to bring the world’s economies to a grinding halt.

The broader Nifty 50 index saw its best one-day gain in more than six months on Friday as policymakers across the world launched fresh efforts to stem the economic fallout of the pandemic, but the index ended the week more than 12% lower.

India’s volatility index shot up to levels last seen during the aftermath of the 2008 financial crisis, closing at 67.10 on Friday.

In case open interest in a scrip exceeds 95% of its position limit, the derivative contract enters a ban period in which investors can only reduce their positions. So, a lower position limit would automatically push scrips with high open interest into a ban.

About 10-12% of the stocks, mostly volatile ones, traded in the futures and options segment will be impacted by SEBI’s measures, according to Jimeet Modi founder of Mumbai-based Samco Securities.

SEBI restricted the extent of short-selling of index derivatives by mutual funds, foreign portfolio investors and proprietary traders to their stock holdings.

“This is like allowing to use steps only to come up but you cannot go down,” said Mumbai-based trader Sovit Manjani, adding that short-selling was an “essential part of markets” and that the curbs by SEBI were “unfair”.

SEBI and stock exchanges were continuously monitoring market developments and would “take any further suitable actions” as required, the regulator said.

The measures will come into effect from March 23 and continue for one month, SEBI said.

Reporting by Abhirup Roy and Savio Shetty;Editing by Elaine Hardcastle