Existing studies reveals that the huge surge in international capital flows since early 1990s has created unprecedented opportunities for the developing countries like India to achieve accelerated economic growth. International financial institutions routinely advise developing countries to adopt policy regimes that encourage capital inflows. Since the introduction of the reform process in the early 1990s, India has witnessed a significant increase in capital inflows. The size of net capital inflows to India increased from US $ 7.1 billion in 1990-91 to US $ 108.0 billion in 2007-08. Today, India has one of the highest net capital inflows among the EMEs of Asia. Capital inflows, however, not an unmitigated blessing. The main danger posed by large and volatile capital inflows is that they may destabilize macroeconomic management. As evident, the intensified pressures due to large and volatile capital flows in India in the recent period in an atmosphere of global uncertainties has posed new challenges for monetary and exchange rate management. The present paper elaborates on various aspects of the capital inflows to India and their policy implications.
Foreign capital has significant role for every national economy, regardless of its level of development. For the developed countries it is necessary to support sustainable development. For the developing countries, it is used to increase accumulation and rate of investments to create conditions for more intensive economic growth. For the transition countries1, it is useful to carry out the reforms and cross to open economy (Edwards, 2004), to cross the past long term problems and to create conditions for stable and continuous growth of GDP, as well as integration in world economy. But, to realize the potential exist in the developing countries, foreign capital plays a very crucial role. Capital inflow2 can help developing countries with economic development by furnishing them with necessary capital and technology. Capital flows contributein filling the resource gap in countries where domestic savings areinadequate to finance investment. Capital inflows allow the recipient country to invest and consume more than it produces when the marginal productivity of capital within its borders is higher than in the capital-rich regions of the world. Capital inflows facilitate the attainment of the millennium development goals (MDGs) and the objective of national economic, empowerment anddevelopment strategy (NEEDs). As the economy becomes more open and integrated with the rest of the world, capital flows will contribute significantly to thetransformation of the developing economy (Levin, 2001). Added to this, capital inflows are necessary for macroeconomic stability as capital inflows affect a wide range of macro-economic variables such as exchange rates, interest rates, foreign exchange reserves, domestic monetary conditions as well as saving and investments. Some commonly observed effects of the capital inflows that have been documented in the recent include real exchange rate appreciation, stock market and real estate boom, reserve accumulation, monetary expansion as well as effect on production and consumption. The international capital flow such as direct and portfolio flows has huge contribution to influence the economic behavior of the countries positively. Countries with well developed financial markets gain significantly from Foreign Direct Investment (FDI). The huge volume of capital flows and their influence on the domestic financial markets, understanding the behaviour of the flows becomes very important especially at time liberalizing the capital account. The study attempts to examine the impact of international financial flows on India’s financial markets and economic growth. The study also examines trends and composition of capital inflows, changing pattern of financial markets in...