The document discusses the integration of the Indian financial market with global markets. It provides details on the growth of the Indian economy and financial system in recent decades from a closed to more open system. It describes the impact of the 2008 global financial crisis on capital flows into India. The benefits of financial integration are also covered, such as risk sharing and increased investment. Methods of integration like cross-listing companies and Indian Depository Receipts are explained.

1. INTEGRATION OF INDIAN
FINANCIAL MARKET WITH
GLOBAL FINANCIAL
MARKET
CHARAK RAY
libra.charak@gmail.com

2. 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.

3.  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.

4. 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.

5.  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.

6. 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.

8. 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.

9. 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.

10. 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.

11.  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).

12.  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

13. 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

14. 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.

15. 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.

16. IMPACT OF 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.

18. 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.

19. CONCLUSION
 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.

20.  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.

21. THANK YOU…