FINANCE INDIA Vol. IX.No. 4, December 1995 Pages — 989-995 Some Critical Issues on the Globalisation of Indian Capital Market ~ SUKUMAR NANDI* ABSTRACT Recently conscious attempts are being made to open up the economy by initiating structural reforms along with the convenibility of the currently an lade account. An attempt js made in this article to explain some crucial issues which give important hindsight about the important parameters of the economy which influence the course of economic changes. With this objective in mind, authors explored two things: (i) the international mobility of capital in the context of India, and (ii) the quantitative relation between the Indian stock market and the stock markets of some important developed countries. Expe ence of the capital mobility across the countries show that irrespective of the existence of control on the mobility of capital and exchange rate movement, some sort of a relation gets established between the capital markets of major countries, RECENTLY CONSCIOUS ATTEMPTS are being made to open up the economy by initiating structural reforms along with the convertibility of the currency on trade account. Further, we are listening a lot of things about the globalisation of the economy, though the latter will be realised when both the industrial and the agricultural sector of the economy will be technotogi- cally mature enough to face the changes of the world. In this context the capital market in India will undergo a lot of changes the signs of which are visible along with the reforms are in the initial stages and a Jot more are being planned to be introduced in near future, It is now too soon to forecast about the probable effects of these on the growth process of the economy, Therefore, an attempt is made in this note to explain some crucial issues which give important hind-right about the important parameters of the economy which influence the course of economic changes. With this objective in view we plan to explore two things in this paper : (j) the international mobility of capital in context of India, and (ii) the quantitative relation between the Indian stock market and the stock markets of some important developed countries. The rest of the paper proceeds as follows, In section, 1, we bring the theoretical aspects of the two issues raised above. Section 2 will deal with the empirical results and the Jast section will come in the form of conclusions, +” Associate Professor, National Institute of Bank Management, Pune. Submitted May '94, Accepted October '94.mance india ¥Y of Capital and World Capital Markets es from 01 andlor lower risks regan nvesiment. A\ y is high, idaries. the two rates are supposed 10 be indepei conventional wisdom when they had con ‘changes in the countries" rates vestment and interpreted this finding as an has been yeated in the hiterature in inct definitions of perfect capital mo- ‘al flows equalise real interest rates of the tries. and this is known as the real interest p y. , expected rates of ret countries’ bonds, regardless of the exposure ta exchange rate and this is known as uncovered interest parity across countries when is covered interest ar conditions as stated above reveals two relationship between the saving - income r 4. In terms of econometrics this tions, Fisst, the empi investment - income f ean be done by the est (WY), = a+b SM), - U, « the random error term with assumed normal distribution and zero variance. This equation helps examining the effects ratio on the investment of the country. The Feldstein - Nandi, Globalisation of Indian Capital Market oor investment depend on the real interest rate only. This aspect leads to the second consideration to which we turn. Second, the interest rates of the countries should be related one way or the other, Thus itis interesting to see to what extent the rates are correlated Further, the index of share price im any country is related to the interest of a trade-off faced by an investor when he takes de about the contents of his porto! the relation the les as suggested in con ick mlarkels across the c% terest rates van reveal the among them, and al relation Like the following can be est nated : Where INCP = F(UKSP, USSP, JASP, GPSP) INSP. index of India UKSP = Stock price index of United Kingdom JASP = Stock price index of Japan GPSP = Stock prive index of Germany ‘The number of the countries on the right hand side of the equa fan be increased, but to prove the qualitative aspect of the argum n of the Indian Capital Market with the major we have reste fe depends of course on the impor garding the trade retation of India with them. The estimated values of the vefficient of the independent variahles give the precise efects of these on © movement of the dependent variable, that is, the index of stock market ices of India, ata Methodology and Emp Data for this study are col 55) and the pe uation (1) and 196 1 Result ted {rom International Finance ies 1960-1988 or the estimation of the 1992 for the estimation of equation (2)... Since es dala may create problem for the serial correlation of the term, Cochrance - Orcutt method of estimation has been applied enever such a situation emerges, otherwise ordinary least square method ‘estimation has been used, To test the hypothesis of capital mobility across countries equation has been estimated and result is as follows WY = 18.05 + 0.207 (SY) +e 3) (statistics (6,336) (1.835) Adjusted Ré = 0.79. SEE = 41.52 DW. Si = 1956 n= 28 y $0022992 Finance India Here both the dependent and independent variables are in percentage and the estimated coefficient of (S/Y) is significant at 7.8% level only, Thus the saving - income ratio influences the investment - income ratio for the extent of 20 percent only and that too with the level of significance being 7.8 percent ‘The findings above do not support the findings of the Fledstein and Horioka that the estimated value of b of equation (1) should be closer to I than 0, indicating the lack of capital mobility across countries’ border But any student of Indian economic growth understands that the implica- tion of the low estimated value of b has nothing to do with capital mobility, and it points two simple facts, First, capital formation in India has occurred’ mainly through the public sector under the programme of. planning, and budgetary policies have given considerable support in this matter, Second, the investment - saving gap has been filled up to a certain extent by foreign loan, and this is reflected in the persistent gap in the balance of trade, On both counts, Indian capital market could not play a significant role, The low saving ratio in the beginning and pervasive control along with the predominant process reduced the dynamism of the capital market in India. Notwithstanding the above observation, the empirical results show that investment and capital formation in India depended less on domestic savings. To what extent it depended on forced savings through the budgetary process is a separate issue and this is not followed up in this paper Stock Market Price Indices and Interest Rate To what extent capital markets of different countries are interrelated can be known if we try to quantify the relation. For that a correlation matrix has been calculated taking the stock market price indices of five countries along with their interest rates. This is shown in Table 1. A look at the correlation coefficients shows that the stock prices are highly correlated across the coun- tries. Even the correlations between stock prices in India and that in other countries are high though capital mobility is ruled out by the exchange control regime. One interesting aspect in the negative correlation with Japa- nese interest rates. Another interesting aspect is the poor correlation between American Stock prices and interest ratios. Finally, we are to see the casual dependence, that is, to what extent the stock price index in India depends on the indices of other countries. We have estimated the equation (2) and the result is as follows : INSP = -96.68 ~ 0.248 UKSP + 4.052 USSP ~ 1.308 JPSP - 0.714 GPSP +e (-3.33) _ (-0.286) (5.23) (4.89) (-1.21) Adjusted R? = 0.94 SEE = 19303.6 DW, Statistic = 2,02 n=29