Analysis of FII inflows from Japan and EU

Abstract

International portfolio flows are, as opposed to foreign direct investment, liquid in nature and are motivated by international portfolio diversification benefits for individual and institutional investors in industrial countries. They are usually undertaken by institutional investors like pension funds and mutual funds. Such flows are, therefore, largely determined by the performance of the stock markets of the host countries relative to world markets. With the opening of stock markets in various emerging economies to foreign investors, investors in industrial countries have increasingly sought to realize the potential for portfolio diversification that these markets present. While the Mexican crisis of 1994, the subsequent ‘Tequila effect’, and the widespread ‘Asian crisis’ have had temporary dampening effects on international portfolio flows, they have failed to counter the long-term momentum of these flows. Portfolio investment flows are becoming increasingly important for emerging markets like India. They are affected by a variety of factors, like interest rate differentials between the home country and the country of investment, structural factors, equity markets and overall outlook for the country where investment is targeted. They also tend to affect macroeconomic parameters of the recipient country like money growth, exchange rates, inflation and so on. The next section discusses the growth of portfolio funds in India.