Foreign portfolio flows and emerging stock market: Is the midnight bell ringing in India?

Abstract

This paper is concerned with the behavior of foreign portfolio flows, and the interaction between flows and returns, in one of the fastest growing emerging markets, India. We use a combined with, the adaptive market framework to examine the relevant issues. We find that the degree of efficiency of the stock market is time varying, and that inefficiency attracts flows seeking excess returns. But foreign institutional investors do not influence the efficiency of the Indian stock market. There appears to be a contemporaneous relationship between flows and returns volatility with push factors significantly influencing flows. Our findings suggest that the present policy framework in India is in fact effective, and that prudential norms are the best way to deal with volatile portfolio flows.