Does Foreign Institutional Investment in India Increase Financial Vulnerability? An Empirical Investigation Using an Event Study Approach

A new policy brief from Ila Patnaik, Ajay Shah and Nirvikar Singh emphasises the value of detailed empirical analysis as a precursor to any policymaking.

It examines the topic of the financial stability implications of globalisation, as well as asking whether extreme events in world markets induce extreme behaviour by foreign investors, thus making them vectors of crisis transmission.

The policy brief highlights three main implications of the main research paper (linked to below).  Firstly, that conceptual tools for assessing financial stability are important, as are, secondly, empirical tools for measuring domestic impacts of foreign investor behaviour.  Thirdly, the researchers highlight the specific implications for India, namely that policymakers may need to worry relatively less about the destabilizing effects of foreign portfolio flows on Indian financial markets, or on the exchange rate, when they are conceptualizing policy and framing responses toward various forms of foreign capital.

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