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Foreign Portfolio Flows into India: Openness and Basic Motives

Foreign Portfolio Flows into India: Openness and Basic Motives

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This book argues that, it is essential to understand the present openness and the basic motives underlying the financial flows before fully liberalizing them. In this work, an empirical analysis to understand the openness of foreign portfolio flows and identify whether the foreign portfolio flows to India are driven either by the capital gains motive or the income gains motive is attempted. For the first issue the study adopts the popular method developed by Quinn (1997) and estimate openness index, which uses dummies for different capital controls and finds that most of the controls on foreign portfolio flows are relaxed in the Indian scenario. Importantly in the second issue it has been found that these flows to India are driven primarily due to the capital gains motive. This results assumes significance in the context that even an institution like IMF which supported 'free capital mobility' especially short term capital flows has now reversed their long held position on capital controls while agreeing that controls can be helpful, and can constitute a "legitimate part" of policymakers' toolkit.