Efficient changes in the composition of capital flows

Efficient capital markets are essential for economic
growth and prosperity. An integral part of capital market is the stock market,
the development of which is linked with the country’s level of savings,
investment and the rate of economic growth. India’s stock market has been
classified as one of the fastest growing markets. Bombay Stock Exchange (BSE) and
National Stock Exchange (NSE) are the largest and most liquid exchanges in
India and they are the major sources of capital formation in India.  Local and foreign investor’s confidence in
the investment environment of India has boosted the stock market index in
recent years. The developing countries are witnessing changes in the
composition of capital flows in their economies because of the expansion and
integration of the world equity market. The stock markets are also experiencing
this change. It is generally recognized that a strong financial system
guarantees the economic growth and stability. Stock market is an integral part
of the financial system of the economy. It is a source of financing a new
venture based on its expected profitability. The stock market is replica of the
economic strength of any country. To boost investment, savings and economic
growth, the development of stock market is imperative and cannot be ignored in
any economy. Foreign direct investments (FDIs) are becoming important source of
finance in developing countries including India. Foreign Direct Investment  in developing economies has grown rapidly following financial and
political transformations. To increase their share of FDI flows, most of the
countries ease restrictions on foreign direct investment, strengthened macro stability,
privatization of state-owned enterprises, domestic financial reforms, capital
account liberalization, tax incentives and subsidies have been instituted. In addition, stock markets have been established to
intermediate funds towards investment projects. The positive response of these
structural changes in attracting FDI and its consequence on their financial
markets especially stock market is obvious. With the advent of information
technology, especially the internet-based applications in the capital markets
at the global level, information describing the macro and micro environment of
economies is readily accessible. This flow of information has perhaps, made the
capital markets relatively more efficient as the stakeholders are better placed
to access and act in accordance with the changing dynamics of environment. In
today’s globally integrated world, information access is easy and universal.