Why India is Vulnerable to Portfolio Investment Movements

Analysis of capital flows between India and the United States

Mandira Sarma

Published: December 2013

This paper analyses the trend of capital flows between India and the US during 2000–2012. The US is a major source of foreign capital in India, through both direct and portfolio investment. During this period, portfolio investment from the US to India dominated over direct investment. A large part of India’s outward FDI is towards the US, although in terms of total FDI in the US, India’s share is not very large. Internationally active Indian banks have the largest foreign claims towards the US, however this amounts to less than 1% of the Indian banking sector.

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More Papers From This Author in World Economics:

Measuring Financial Inclusion using Multidimensional Data
Author: Mandira Sarma

The author notes that the lack of a financially inclusive system is a major concern not only for developing and low-income economies, but for many developed and high-income countries. At the global level, a network of financial regulators from developing and emerging economies, called the Alliance for Financial Inclusion (AFI), was formed in 2008 to provide a platform for peer-to-peer learning from the experiences of country specific policies of financial inclusion. The paper notes that there has been an intensive debate about how financial inclusion should be measured. In consequence, it recommends using the Index of Financial Inclusion (IFI), developed by the author. The IFI is multidimensional, it satisfies many important mathematical properties and can be used to compare levels of financial inclusion across economies and over time. IFI values computed for 110 countries for 2014 show various levels of financial inclusion: Chad ranked lowest with an IFI value of 0.021 while Switzerland had a value of 0.939. Measuring the IFI over 2004 – 2014 indicates a general improvement in the level of financial inclusion across countries, but the availability of data is the biggest constraint on its usefulness.

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