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Foreign Portfolio Investment Flows To India -- Determinants And Analysis

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  • Pami Dua

    (Department of Economics, Delhi School of Economics, Delhi, India)

  • Reetika Garg

    (Department of Economics, Delhi School of Economics, Delhi, India)

Abstract

This paper analyses the determinants of portfolio flows to India for the period October 1995 to October 2011. The determinants of disaggregated component of portfolio flows (FPI) i.e. foreign institutional investment flows (FIIs) and investment flows received through American/Global depository receipts (ADR/GDRs) are also examined. The determinants are based partially on the portfolio balance model in which capital flows in an emerging economy are determined through an arbitrage condition. These include domestic stock market performance, exchange rate, reserves to import ratio, interest rate differential, volatility in exchange rate, domestic output growth, foreign output growth and emerging market equity performance. The results indicate that domestic stock market performance, exchange rate and domestic output growth are the most important determinants of both FII and ADR/GDR flows. Emerging market equity performance, interest rate differential and volatility in exchange rate influence FII flows but not the investment flows received through ADR/GDRs. Moreover ADR/GDR flows are influenced by foreign output growth, but this is not so for the FII flows. Since FIIs have been the most dominant component of aggregate portfolio flows, therefore as expected, the results for aggregate portfolio flows are similar to FII flows.

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Bibliographic Info

Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 225.

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Length: 36 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:cde:cdewps:225

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Keywords: FPI; FII; ADR/GDRs; Portfolio balance framework; ARDL model;

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  1. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  2. Pagano, Marco & Röell, Ailsa A & Zechner, Josef, 2001. "The Geography of Equity Listing: Why Do Companies List Abroad?," CEPR Discussion Papers 2681, C.E.P.R. Discussion Papers.
  3. P., Srinivasan & M., Kalaivani, 2013. "Determinants of Foreign Institutional Investment in India: An Empirical Analysis," MPRA Paper 43778, University Library of Munich, Germany.
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  7. Elaine Karen Buckberg, 1996. "Institutional Investors and Asset Pricing in Emerging Markets," IMF Working Papers 96/2, International Monetary Fund.
  8. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
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  10. Poonam Gupta & James P. F. Gordon, 2003. "Portfolio Flows Into India," IMF Working Papers 03/20, International Monetary Fund.
  11. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  12. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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