The Indian Economy: A Study of its Susceptibility to Fuller Capital Account Convertibility (CAC)

Abstract

The purpose of the project is to find out possible implications for fuller Capital Account Convertibility (CAC) in the Indian context. Fuller CAC implies selling and buying financial assets overseas in market determined exchange rate, which indicates abundant inflow and outflow of FII, FDI in the capital market. Any change in this flow can affect the economy either directly or in an indirect manner. Therefore it is important for any economy to keep a balance between the inward and outward flows of capital across the country. Currently India is experiencing a high momentum cash inflow and withdrawal by Foreign Institutional Investors (FII) and in the backdrop of recent East Asian economic crisis, this calls for special attention. This paper tests the randomness and stationarity of the Indian Stock market (through NIFTY) and then analyzes the long term influence of FII and Mutual Fund on NIFTY performance. Finally it tests for any significant decline in GDP growth in a few East Asian countries before and after fuller CAC implementation. This paper concludes that fuller CAC does not ring an immediate alarm on the performance of the stock market, however GDP growth has been affected post-implementation in other developing countries. India needs to guard itself so that fuller CAC does not make it dependent on foreign investments, rather should give an impetus for robust industrial development.