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Foreign Portfolio Investment Flows To India -- Determinants And Analysis

  • Pami Dua

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

  • Reetika Garg

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

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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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
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Handle: RePEc:cde:cdewps:225
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