ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Financial Reform and Security Market Booms in Emerging Nations

Financial Reform and Security Market Booms in Emerging Nations Swapan Sen Are Security Market Booms Foreign Exchange Reserve Driven?
IN several recent issues of this journal, Prabhat Patnaik and Ranjit Sau, among others, have made important contribution to the understanding of the recent financial liberalisation in India. Independently both have expressed the view that the security market boom in the developing countries following their adoption of a policy of financial liberalisation is the result of increased foreign exchange influx into these countries. A part of their critique of the financial liberalisation is based on the premise that such stock market booms would magnify inflation, and once inflation takes its grip, manipulations of the exchange rate would follow clearing the path for capital flights. Thus, the capital that came frpm abroad would return abroad leaving the country high and dry. According to Patnaik (1994b), 'accumulating foreign exchange reserves would be accompanied by a boom in financial assets, typically a stock market boom" (p 918). Ranjit Sau (1994a) writes: "In our judgment a primary source of inflationary pressure may come from... the wealth effect arising from a stock market boom fuelled by funds released through corporate tax concessions granted in the budget and inflow of foreign portfolio capital" (p 938). In both instances, the stock price increases are connected to the foreign exchange inflows from abroad.

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