Openness and Basic Motives of Foreign Portfolio Capital Flows into India

Abstract

This study argues that, it is essential to understand the present openness and the basic motives underlying the financial flows before fully liberalizing them. In this case, an empirical analysis to understand the openness and to identify whether the foreign portfolio flows to India are driven by the capital gains motive or the income gains motive is attempted. It has been found that most of the controls on foreign portfolio flows are relaxed and these flows to India are driven primarily due to the capital gains motive and in the Indian case it is the change in stock prices. Before the analysis the econometric methodology has confirmed the long lasting relationship between the variables. Moreover, the causality checks also reveal that stock prices are causing the net foreign portfolio flows and not vice-versa.