investment, the question of national taxation policies deserves more careful analysisbecause capital movements can be influenced by different tax regimes. Also thesovereign risk rating should be subject to strict, objective parameters which arepublically known.OECD (2002): The paper shows that it is the best policy to welcome both formsof foreign investment, FDI and FPI, with full respect for their differences. Thepaper explores both, the relationships and the differences, between FDI and FPIunder the assumption that the differencebetween the two is whether the investorhas control over the investment or not. It asserts that the strong and well-regulatedfinancial markets are necessary to deal with the inherent volatility of portfolioflows.The financial system must have the capacity to assessand manage risks if itis to prudently and productively invest foreign capital flows. These risks can be
216Chanchal Chopracredit risk, exchange rate risk, liquidity risk, exposure concentration risk, risksstemming from the institutions’ internal operations and risks inherent in thepayment system. It describes that adequate capital is a necessary element ofprudential regulation, providing a safeguard against losses and a cushion in theface of institutional or systematic problems. It suggests that the supervisors needto be able to verify that capital is adequate and the financial systems exposure isbalanced. Regulation and regulators will be most effective when they createincentives for sound behavior and when their application and practices are able toevolve with the needs of the market. It suggests market discipline can provide thegreatest incentives for effective risk management. The financial safety nets andmarket failure responses should be appropriately designed to resolve market distresssituation. It should be open to foreign competition and marked by broader legal,political and economic environment.GoyalAshima (2004): She asserts that excessive inflows,large foreign exchangetransactions and tendency for market participants to follow each other, tend tomake foreign exchange market unstable. The paper shows appreciation in rupeesince 2002, especially in April 2004, as against depreciation in 1990s, due to largeFII inflows in initial public offerings of public sector units and a sudden drasticdepreciation in May 2004 due to FII outflowsin the fear of political instability,reversal o reforms and unsustainable handouts.It is seen that the fall occurredbecause RBI abstained from its normal intervention even with huge foreign exchangereserves and enhanced sterilization abilities through market stabilization bondsscheme. The paper shows that RBI policy has a large impact on the Indian foreignexchange rate than other market players. It suggests that RBI policies should beput in place for appropriate exchange rate.
You've reached the end of your free preview.
Want to read all 22 pages?