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INTEGRATION OF INDIAN

FINANCIAL MARKET WITH


GLOBAL FINANCIAL
MARKET
INDIAN FINANCIAL MARKET
 In recent years, the Indian economy has seen a great transformation
from a closed, controlled, slow growing economy to a more open,
liberalized and one of the fastest growing economies of the world.

 The rate of savings in India is constantly rising. The gross domestic


savings in the year 2005-06 is estimated at Rs.1, 156,809. The rise in
the savings rate has with an increase in the rate of growth of GDP
over the last three years.

 Indian markets have established itself as a playground deemed to


provide good opportunities to investors.

 Investments in Indian market hence have been considered as a safe


place to invest by the investors.
 In India money market is regulated by Reserve bank of
India and Securities Exchange Board of India (SEBI)
regulates capital market. Capital market consists of primary
market and secondary market. All Initial Public Offerings
comes under the primary market and all secondary market
transactions deals in secondary market.

 Secondary market refers to a market where securities are


traded after being initially offered to the public in the
primary market and/or listed on the Stock Exchange.
Secondary market comprises of equity markets and the
debt markets. In the secondary market transactions BSE
and NSE plays a great role in exchange of capital market
instruments.
INTEGRATION OF THE
MARKETS-ITS IMPACT
 The main impact of the global financial turmoil in India has emanated
from the significant change experienced in the capital account in 2008-
09so far, relative to the previous year. Total net capital flows fell from
US$17.3 billion in April-June 2007 to US$13.2 billion in April-June
2008.

 While Foreign Direct Investment (FDI) inflows have continued to


exhibit accelerated growth

 Foreign institutional investors (FIIs) witnessed a net outflow of about


US$ 6.4 billion in April-September 2008 as compared with a net inflow
of US$ 15.5 billion in the corresponding period last year.

 External commercial borrowings of the corporate sector declined from


US$ 7.0 billion in April-June 2007 to US$ 1.6 billion in April-June 2008

 The primary market has had a direct relation with the secondary
market. The Bull Run in the secondary market has in the past enabled
and emboldened companies to enter the market with big issues and
attract investors and traders to invest in public issues to reap high
profits following their listing.
 The BSE Sensex increased significantly from a level of 13,072 as
at end-March 2007 to its peak of 20,873 on January 8, 2008.
However with portfolio flows reversing in 2008, partly because of
the international market turmoil, the Sensex has now dropped to
a level of 11,328 on October 8, 2008, in line with similar large
declines in other major stock markets.

 Foreign Investment also came down heavily due to a liquidity


crunch in the major companies.

 The stock market Of the United states of America or Wall Street


stock exchange crashed due to a crisis in the housing finance
sector of its leading banks, caused due to delinquency and non-
repayment of housing loans, resulting in panic in the world
markets including India.
BENEFITS
 The benefits of international risk sharing for
consumption smoothing, the positive impact of
capital flows on domestic investment and growth,
enhanced macroeconomic discipline and increased
efficiency as well as greater stability of the domestic
financial system associated with financial openness.

 International financial integration could positively


affect total factor productivity. Financial openness
may increase the depth and breadth of domestic
financial markets and lead to an increase in the
degree of efficiency of the financial intermediation
process by lowering costs and excessive profits

 The cumulative growth performance of emerging


markets, excluding China and India, appears less
spectacular than usually perceived under
globalization.
How could the Indian financial market get affected by a
financial turmoil in United States?

 The impact of FIIs is so high that whenever FIIs tend to withdraw the money
from market, the domestic investors become fearful and they also withdraw
from market.

 In case of January 18, 2008, the Sensex lost almost 687 points. Here, the net
sales by FIIs were Rs. 1348.40 Crores. This is a major contributor to the fall
on that day.But contrary to that day, take the case on January 21, 2008, the
Sensex lost 1408 points and the gross sales was Rs. 1060.30 Crores and the
purchases were Rs. 3062.00 Crores. So this can be concluded that after the
fall of market, FIIs had invested again into the market.
 Depreciation in rupee value has added to the worries of FIIs. Depreciation in
currency leads to losses (in dollar terms) for the FIIs, as they have to
periodically represent to market value of their investments overseas. Many
speculate the fear of depreciation of rupee even more against the dollar. If
that happens, FIIs will have to report huge losses on the currency account,
and hence are pulling out from the domestic markets.
From the above data, it can be noted:
Increase in net investments till 2005.
Small decrease in investments in the year 2006, but there
was a steep increase in the year 2007-08. This was the
best period in Indian stock market where stock prices got
increased and the market was in good mood.
In early 2008, the government liberalized its policy
towards foreign investment in the following key economic
sectors by increasing the maximum permitted foreign
investment to:-

 49 per cent for commodity exchanges.

 49 per cent for credit information companies.

 74 per cent for non-scheduled airlines (however, foreign


airlines are not allowed to invest in a scheduled airline
company in India)

 100 per cent in titanium mining with prior Indian


Government approval.
 October last year, markets regulator had put a 40 per cent
cap on FIIs’ total asset holding via participatory notes or
overseas derivatives instruments and stopped them from
issuing fresh P notes or renewal of old ones with an 18-
month deadline ending in March 2009 to do the needful.

 The move was aimed to keep track of foreign flows into the
country. However SEBI has removed the existing limit on
distribution of FII investment a day after the government
doubled the cap on their investment in corporate debt to $6
billion. This was a result of FII’s pulling out of the Indian
equity market (US$11.56 billion) and pumping money in
the debt market (US$1.8 billion).
 So far as security receipts issued by the Asset Reconstruction
Companies (ARCs) are concerned, the total holding of a single
FII in each tranche of scheme must not exceed 10 per cent of
the issue.

 Besides, the total holding of all FIIs put together must not
exceed 49 per cent of the paid up value of each tranche of
scheme of security receipts issued by ARCs.

 The relaxation, according to Sebi, is aimed at “greater flexibility


to the FIIs to allocate investments across equity and debt.”

 It will have a two-way positive impact:

This will enable FIIs to invest without any obligation

This will also enable Indian companies to get more funds for
their expansion plans
A STEP TOWARDS
INTEGRATION OF THE
MARKETS
 In recent years, a growing number of countries- both
developed and developing - are opening their stock
markets to foreign investors and abolishing laws restricting
their citizens from investing abroad.

 Companies that previously had to raise capital in the


domestic market can now tap foreign sources of capital
that demand lower rates of return. In order to do so,
companies may list their stocks on foreign stock exchanges
while investors may trade overseas
One of the techniques : CROSS LISTING
 Cross-listing is a dynamic and destabilizing force that has moved
liquidity from local exchanges to international markets, thereby
compelling a consolidation among market centers.

 Cross listing is effected with the issuer first establishing a


depository receipts facility (typically, with a major bank).

 The bank will hold shares of the foreign issuer and issue depository
receipts to U.S. investors, who will thereby achieve the
convenience of denominated trading. These depository receipts
then may (or may not) be listed on a Stock exchange.

 Correspondingly, the number of foreign companies listed on the


two principal U.S. stock markets (the NYSE and NASDAQ) grew
from 170 in 1990 to over 750 in 2000 (or roughly a 450%
increase). As of April 2001, over 970 non-U.S. firms were listed on
the NYSE, NASDAQ. During the 1990s, trading of ADRs grew
rapidly, reaching $1,185 billion in 2000.
INDIAN DEPOSITORY
RECEIPTS
 A step towards integration of Indian security market with global markets.

 IDR is an instrument in the form of depository receipt created by the domestic


depository in India against the underlying equity shares of the issuing company;
they allow foreign companies to mobilize funds from Indian markets by offering
equity and getting listed on Indian stock exchanges.

Technique– CROSS LISTING

 Cross-listing increases the shareholder base, the firm's risk is shared among more
shareholders, and this increased diversification reduces the firm's cost of capital.
For a time, the empirical evidence seemed to confirm this explanation because the
stock prices of cross-listing firms seemed to rise and then decline post-listing.
IMPACT--IDRs
 By dual-listing their stock, firms are expected to experience an
increase in stock price since investors in the foreign market
are willing to pay a higher price for the stock. The result is due
to the stock having a lower expected return, and therefore a
lower cost of capital for the firm.
 From the existing shareholder's point of view, their wealth
increases as the value of their securities rises. Multiple listing
can thus be a tool for increasing shareholder’s value, simply
by taking some procedural steps and bearing the
administrative costs involved.
 The regulatory concerns related to cross listings
 Informed trading is general form in which hold private
information with regard to stocks, issuing company.
 Insider trading which is not considered ethical, will be done in
legal manner by denoting trading by persons who are in
special relationships with the firm, as defined by the law.
SUGGESTIONS
 1. Increase rupee liquidity
 2. Increase dollar liquidity
 3. Exchange rate policy

Other suggestions:
 Focus more on growth by improving public and private
investment continue to take measures for improving
liquidity enhance investor confidence to ensure growth of
industry.

 All banks should be asked to make a liquidity plan and a


solvency plan. RBI should review these plans and insist
that each of these plans have quantitative monitorable
actions and targets.
CONCLUSIONS
 Though we cannot unambiguously conclude the existence of
perfect total integration of Indian market with the world
markets given the limitations of our analysis. However, we can
unambiguously assert that over time, with the opening up of
economies and integration and strengthening of domestic
financial markets, the benefits from asset diversification are
getting exhausted.

 A key feature of global financial integration during the past


three decades has reflected in the shift in the composition of
capital flows to developing and emerging market economies,
especially from official to private flows.
 East and South East Asian economies, in particular, have
achieved substantial integration. Apart from Asia’s growing
integration with the rest of the world, increasing integration
within Asia also reflects the growing intra-regional trade and
financial flows. Evidence from price-based measures
suggests that financial market integration in Asia has been
increasing.

 There is evidence of India’s growing international integration


through trade and cross border capital flows. India’s trade
and financial links with Asia are also growing amidst recent
initiatives taken to promote regional cooperation.

 Emerging Asia has become the ‘growth centre’ of the world


due to shifting of production base to the region.