Capital Flows and Domestic Financial Sector in India

This paper is a preliminary analysis of the impact of capital flows upon the domestic financial sector. We find that an inflow of foreign capital has a significant impact on domestic money supply and stock market growth, liquidity and volatility. The banking sector, however, remains relatively insulated due to policy responses of the central bank and barriers to direct capital inflows into the banking system. The paper concludes with a discussion on the costs of these policies in the event of a heavy inflow of foreign capital into India.