Inflows of capital, exchange rates and balance of payments: the post-liberalisation experience of India
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Date
2013
Authors
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Journal ISSN
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Publisher
Indian Institute of Economics
Abstract
A review of the analytical literature shows that macroeconomic consequences of financial liberalization are the results of the combined effect of monetary, fiscal as well as trade and exchange rate policies followed by the government of a country. The results of vector error correction estimates show that total inflows of foreign capital are causing imports; and imports are causing inflows of foreign capital. This means that there is a bi-directional relationship between these two variables. This may be due to an increase in the imports in the industries where more and capital flows are coming in. During the period of Capital Account Convertibility (CAC) there is a positive growth in all the macro economic variables studied. Along with growth the variability has also increased. Both FDI and FPI have registered positive growth rates but along with this the variability also has increased. As expected, FPI is more volatile than FDI flows in India.
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Keywords
Capital Account Convertibility, FDI, FPI, Financial liberalization, Vector Error Correction, Cointegration, Capital flows, Economic growth
Citation
Ramakrishna, G. & Rena, R. (2013). Inflows of capital, exchange rates and balance of payments: the post-liberalisation experience of India. The Asian Economic Review, 55(2): 223- 242