Essay on International Capital Movement

12185 Words Feb 15th, 2013 49 Pages


Existing studies reveals that the huge surge in international capital flows since early 1990s has created unprecedented opportunities for the developing countries like India to achieve accelerated economic growth. International financial institutions routinely advise developing countries to adopt policy regimes that encourage capital inflows. Since the introduction of the reform process in the early 1990s, India has witnessed a significant increase in capital inflows. The size of net capital inflows to India increased from US $ 7.1 billion in 1990-91 to US $ 108.0 billion in 2007-08. Today, India has one of the highest net capital inflows among the EMEs of Asia. Capital inflows, however, not an unmitigated
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Technological advances in telecommunications and computers, including risk management software, have contributed importantly to the increased globalization of portfolio investment. These technological advances lowered information and transactions costs for portfolio managers, enabling them to handle larger, more diversified portfolios.The growth of broad, liquid markets in underlying capital market instruments encouraged the development of derivative instruments, such as futures and options, whose use enables fund managers to unbundle risks and more efficiently manage the risk/return profiles of their portfolios. The development of active derivatives markets, in turn, provided a further impetus to globalization of asset holdings.

The decline in the number of traditional market makers can be explained, in part, by the merger of some large banks in recent years, but it seems, also, that some banks have simply found this line of business not sufficiently profitable. This reduced profitability probably reflects, in part, the erosion of market makers' information advantage with the improvement and spread of communications and information technology. The latter development suggests greater market efficiency, and is consistent with observations by several market participants that intra-day volatility of exchange rates has declined and that the frequency of "gapping" (discontinuous rate movements with no trading) has increased as

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