Abstract
This paper examines whether the surge in FII inflows to India is consistent with the standard models of international portfolio choice. Our analysis shows that the FIIs are investing in India primarily due to the high returns that may be earned by investing in India and not because of the diversification benefits that accrue to a foreign portfolio investor by choosing to invest in an emerging market like India. Therefore, any attempts by the policymakers to use the forex reserves for financing any real assets have to be very carefully weighed because substantial part of the Indian forex reserves are built from the portfolio flows.
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