Foreign Portfolio Investment, Stock Market and Economic Development: A Case Study in India

Abstract

The objective of this study is to examine the impact of Foreign Portfolio Investment on India’s economy and industry. As FPI essentially interacts with the real economy via the stock market, the effect of stock market on the country’s economic development will also be examined. The findings of this paper show that the perceived benefits of foreign portfolio investment have not been realized in India. From the results of this study it can be said that the mainstream argument that the entry of foreign portfolio investors will boost a country's stock market and consequently the economy, does not seem be working in India. The influx of FIIs has indeed influenced the secondary market segment of the Indian stock market. But the supposed linkage effects with the real economy have not worked in the way the mainstream model predicts. Instead there has been an increased uncertainty and skepticism about the stock market in this country. On the other hand, the surge in foreign portfolio investment in the Indian economy has introduced some serious problems of macroeconomic management for the policymakers. Uncertainty and volatility associated with FPI have not only reduced the degrees of maneuverability available to the policymakers but have also forced them to take some measures which impose significant fiscal cost on the economy. Though this study focuses on India and draws policy implications based on the Indian experience, the results and policy implications of this study can be used to draw lessons for other developing which are at the same or similar level of development.