Foreign Institutional Investors
FOREIGN INSTITUTIONAL INVESTMENTS AND THE INDIAN STOCK MARKET
K.S. Chalapati Rao, K.V.K. Ranganathan and M.R. Murthy* To facilitate foreign private capital flows in the form of portfolio investments, developing countries have been advised to develop their stock markets. It was suggested that these investments would help the stock markets directly through widening investor base and indirectly by compelling local authorities to improve the trading systems. While the volatility associated with portfolio capital flows is well known, there is also a concern that foreign institutional investors might introduce distortions in the host country markets due to the pressure on them to secure capital gains. In this context, this paper seeks to assess the importance of foreign portfolio investments in India relative to other major forms and to study the relationship between foreign portfolio investments and trends in the Indian stock market during the past four years. Introduction The character of global capital flows to developing countries underwent significant changes on many counts during the 'nineties. By the time the East Asian financial crisis surfaced, the overall size of the flows more than tripled. It stood at US$ 100.8 bn. in 1990 and rose to US$ 308.1 bn. by 1996. The increase was entirely due to the sharp rise in the flows under private account that rose from US$ 43.9 bn. to 275.9 billion during the same period. In relative terms the percentage of private account capital flows increased from 43.55 to 89.55 per cent (Table 1). Simultaneously, the Official Development Assistance (ODA), declined both in relative and absolute terms. All the main components of the private account capital transfers, namely, (a) commercial loans, (b) foreign direct investments (FDI), and (c) foreign portfolio investments (equity and bonds) (FPI) recorded significant increases. Portfolio flows increased at a faster rate than direct investments on private account. As a result, starting
K.S. Chalapati Rao, K.V.K. Ranganathan and M.R. Murthy* To facilitate foreign private capital flows in the form of portfolio investments, developing countries have been advised to develop their stock markets. It was suggested that these investments would help the stock markets directly through widening investor base and indirectly by compelling local authorities to improve the trading systems. While the volatility associated with portfolio capital flows is well known, there is also a concern that foreign institutional investors might introduce distortions in the host country markets due to the pressure on them to secure capital gains. In this context, this paper seeks to assess the importance of foreign portfolio investments in India relative to other major forms and to study the relationship between foreign portfolio investments and trends in the Indian stock market during the past four years. Introduction The character of global capital flows to developing countries underwent significant changes on many counts during the 'nineties. By the time the East Asian financial crisis surfaced, the overall size of the flows more than tripled. It stood at US$ 100.8 bn. in 1990 and rose to US$ 308.1 bn. by 1996. The increase was entirely due to the sharp rise in the flows under private account that rose from US$ 43.9 bn. to 275.9 billion during the same period. In relative terms the percentage of private account capital flows increased from 43.55 to 89.55 per cent (Table 1). Simultaneously, the Official Development Assistance (ODA), declined both in relative and absolute terms. All the main components of the private account capital transfers, namely, (a) commercial loans, (b) foreign direct investments (FDI), and (c) foreign portfolio investments (equity and bonds) (FPI) recorded significant increases. Portfolio flows increased at a faster rate than direct investments on private account. As a result, starting
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