Major changes are taking place in the USA and Europe. They are likely to affect our markets significantly. I do not know if Indian business media is paying attention to these changes.
In the USA, President Obama has called for greater regulation over the hedge fund business. The funds will have to deleverage. They will be required to maintain higher capital for derivatives. The funds will come under the control of an existing or newly created regulator.
In Europe, the European Parliament is debating much stiffer control over hedge funds. Current leverage is likely to become history. More 'real' capital will be required to maintain a derivatives position.
What this means for us is the fact the FII's will be required to arrange more capital to invest the same amount of money. This will affect emerging markets more mainly becuse these markets are volatile and respond quickly, either way - up and down.
In India, the growth of local insuance companies and domestic financial institutions will replace at least some of the hot money inflows that may not come. But, all of this so called liquidity may be affected by the new regulations.
My Notes: This is all for the good. In the long term, unregulated financial institutions should be unacceptable. Just see how these greedy, immoral people brought the entire world on the brink of disaster. If the froth and bubble goes out of the market, so much the better.