Capital account liberalization and stability of capital markets in India

Inhaltsverzeichnis (Table of Contents)

• Introduction
• Research Problem and Relevance
• Preliminary Trends
• Estimation Procedure and Results
• Conclusion and Policy Implications

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This paper investigates the impact of capital account liberalization, specifically foreign portfolio investment liberalization, on the stability of Indian capital markets. It uses two indicators, market liquidity and volatility, to assess market stability during the period from 1993-94 to 2007-08. The study analyzes the influence of capital account liberalization while controlling for other variables impacting market stability. The analysis aims to provide insights into the consequences of capital account liberalization on market liquidity and volatility in India.

• Impact of capital account liberalization on market stability in India
• Influence of foreign portfolio investment liberalization on market liquidity and volatility
• Comparison of India's financial liberalization sequencing with other countries
• Policy implications of capital account convertibility in India
• Analysis of net capital flows and stock market indicators following liberalization

Zusammenfassung der Kapitel (Chapter Summaries)

• Introduction: This chapter provides background information on capital account liberalization in developing countries and discusses the theoretical implications of liberalization on market stability. It highlights the mixed evidence from empirical studies and country experiences.
• Research Problem and Relevance: This chapter focuses on the evolution of India's capital account policy from an inward-looking approach to a more convertible regime. It describes the liberalization process, including the opening of financial markets to foreign portfolio capital and the sequencing pattern followed by India. The chapter emphasizes the objectives of FPI opening in India and the lack of comprehensive studies on the implications of capital account liberalization on stock market liquidity and volatility.
• Preliminary trends: This chapter analyzes data on foreign portfolio investment (FPI) and foreign direct investment (FDI) flows in India following liberalization. It highlights the dominance of FPI flows over FDI flows and the significant share of net foreign investment inflows in total flows.

Schlüsselwörter (Keywords)

The primary focus of this paper is on capital account liberalization, portfolio flows, financial stability, liquidity, volatility, and financial sector reforms. The analysis examines the impact of foreign portfolio investment on the Indian stock market, offering insights into the relationship between liberalization and market stability. The study contributes to the understanding of financial liberalization processes in emerging economies, particularly in the context of India.