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Generally, Asian companies are listed through American Depository Receipts in US Stock Exchange. Almost all the top-notch Indian companies that constitute the BSE 30 are listed through ADRs in US (there are approximately 80). So if the Dow dips or rises, Indian ADRs too dance to the same tune (not always, but in general).

Its evident that globalization has interlinked countries to such an extent that any change in the major stock market will reflect changes in the others too. Trade and capital flows have increased to enormous volumes. As US accounts for more than 1/4th of the world's GDP show, any little change in US stocks will immediately show on the other emerging markets. Increased investments in US will enhance software developments and BPO industries in India. Good growth in US economy will improve the tourism industry around the world. Any decision by US Fed (monetary policies) will affect the performance of other markets.

In May '06, when US Fed members hinted about the concerns of inflation, markets crashed across the world (of course there was little effect on European markets). Investors interpreted this to mean higher interest rates, more savings in the bank, lesser investments by public/firms, slower the economic growth. It may be that this is a test by US Fed to check their influence on other economies. Now US is in a position to threaten any country directly (war) or indirectly (hurting economies), and India may have to revisit their policies to reduce the influence of FIIs on the country's growth.

Globalization brings in many advantages, and Indian companies have gained hugely with the access to global capital markets. India itself is propelling with growth in all sectors because of the reforms bought in by government due to the pressure of FIIs. But there are also few disadvantages, like loss of control on the nation's economy. It would be better if RBI takes this point seriously and finds out the ways to cut down the dependency of our economy on FIIs.

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* Contributed by -
Viswanath G. K. Akella,
PGPM 2007,
Great Lakes Institute of Management, Chennai.