Capital account liberalization and stability of capital markets in India

Scientific Study from the year 2011 in the subject Economics - Macro-economics, general, printed single-sided, grade: -, - (Institute for Financial Management and Research (IFMR)), language: English, abstract: This paper examines the implications of capital account liberalization on the stability of capital markets in India captured in terms of two indicators, the market liquidity indicator and market volatility from 1993-94 to 2007-08. The empirical analysis, after controlling for other variables affecting the stability of capital markets, shows that capital account liberalization; particularly foreign portfolio investment liberalization has not contributed significantly to market liquidity whereas it has contributed significantly to increased market volatility. These results are particularly relevant since India opened its financial markets to Foreign Portfolio flows at an earlier stage of its reform process much before the development of domestic financial markets unlike the sequencing pattern flowed by most countries that were undergoing similar process of liberalization. Further, these results have important policy implications since the choice of an attitude towards full capital account convertibility in India has become a debateful issue.