A complete flow of funds model
for household portfolio choice
is estimated for India over the period 1951-52 to 1993-94
in this paper. Since the published data is incomplete, the authors build on these data to construct the necessary time series of socks, flows and rates of return for the Indian household sector. A broad based 5 asset model that includes both liquid assets and liabilities and longer term securities is estimated with Almost Ideal Demand System
as the framework for the empirical model. Various co integration techniques are used to estimate the static equilibrium relationships here. The substitution effects
and financial assets
are examined in this framework.
The estimation results suggest a strong influence of interest rates on portfolio behaviour in India in the period of analysis. The evidence of a relatively gently sloped LM curve suggest a wide scope for using interest policy but the impact may be mitigated by strong substitution effects among risk free assets. The inflation effect on the demand for money can be interpreted as a move form money to goods but also a switch into a broad array of financial assets. A tentative evidence of a speculative effect in stock market is also obtained .The evidence of a significant exchange rate effect even during the period of tight exchange controls suggest the authorities to consider the response of money demand to foreign factors in formulating monetary policy.
This paper contributes to a great extent to the existing research on household portfolio in developing countries as it provides the only comprehensive sector specific flow of funds model for a developing country. However in this study, only static relationships are estimated leaving the dynamic part as an agenda for future research due to the small sample size. Hence extending this study by including the post liberalization period from 1993-94 to the present can help in estimating the dynamic relationships also. Up to 1993-94, there has been a tightly controlled and regulated policy regime in India. After 1993-94, the policy regime has been changed to a market oriented and deregulated one in India. Many financial, monetary and external sector reforms have been implemented in India till then which might have considerably influenced the nature and composition of household portfolio in India. Considering all these, extending this study can provide useful insights regarding the household portfolio behavior in India.