FII’s role in the promotion of Indian capital market

Abstract

During 1980s, the developing countries started liberalizing their economies. newlineThere has been a greater emphasis on the development of equity markets as a part of financial reforms. India has also followed this path. With the globalization, financial markets are becoming more and more important every day. A developed stock market is considered crucial to national economic growth as it provides an additional channel along with banks and other financial institutions, for encouraging and thus mobilizing domestic savings. It also ensures improvements in the productivity of investment through market allocation of capital and increases managerial discipline through the market for corporate control. A study by World Institute for Development Economic Research (WIDER, 1990) has argued that the developing countries should liberalize their financial markets in order to attract foreign portfolio equity flow. The huge amount of financial capital available in the developed countries through pension and investment funds could be attracted to the developing countries provided the latter liberalize their markets externally and developed their stock market internally. Capital markets have taken a prominent place in the developing countries financial system during the last decade. The most important measure taken in this regard by developing countries was the opening of their respective stock markets to international investors. This step, taken in the late 1980s or early 1990s, resulted in historically high level of portfolio investment in the emerging markets by global and regional funds. In developing countries like, India there is a great need of foreign capital not only to increase productivity of labour but also to build foreign exchange reserve to meet trade deficits. After opening up the borders for capital movement in 1991, foreign investment in India have grown enormously.