Globalization of Finance: India’s Experience of Capital Flows

Abstract

Globalization of finance measured in terms of capital account liberalization has been viewed by many economists as an important component of the overall opening up of global trade and financial markets especially in recent years. It is in this context, paper seeks to analyse issue of CAC in India. Study reveals that capital account surplus is mainly accounted for by non-debt creating foreign investment inflows. Foreign investment and banking balance accounted 80 percent of surplus in capital account. All the components of capital account (except banking capital) witnessed decrease in inflows to outflows ratio during post-CAC period. Banking capital experienced rapid increase in inflows/outflows ratio due to rapid increase in NRIs deposits. Regarding impact of capital account balance on Indian economy, on the positive side, capital account balance significantly reduced inflation and external debt to GDP ratio but on the negative side failed to reduce fiscal deficit and increase in industrial production. RBI should direct more calibrated distribution of bank credit in favour of al productive sectors to increase overall investment in the country. So that capital account surplus can be managed.