Recent Trends of Capital Flows and Growth in India

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. Capital flows are important and effective for a country when the magnitude of those flows is high, steady and stable. The international capital flows, whether in the form of direct or portfolio investment has a potential to contribute in the economic growth in an economy. In the present study found that Foreign Direct Investment (FDI) is positively, though not significantly, affecting the economic growth, while Foreign Institutional Investment (FII) is having a negative effect. The empirical analysis shows that capital inflows have not contributed much towards economic growth. There are two reasons for this, one the amount of capital inflows to the country has not been enough, and two, the amount of capital that does flow in is not utilized to its full potential. The cumulative net investment of Foreign Institutional Investors (FIIs) has increased from Rs 25941 crores in December 1993 to Rs. 534747.88 crores as on March 2011. Growing presence of the FIIs in the last 20 years has raised questions over the investment behavior of this class of investors. The common perception about FIIs is that they follow each other into and out of securities. FIIs herding has attracted the attention of various market participants. Regulators are interested in it because herding can escalate volatility and create instability in the market. Investors and other market participants are interested because herding may cause the prices to move away from the fundamental value and present profitable trading opportunities. The present study is an attempt to analyses the aforesaid issues in India, besides examining the impact of international capital flows on its economic growth.