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Estimating the Relationship Between the Current Account, the Capital Account and Investment for India

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  • Ashima Goyal
  • Vaishnavi Sharma

Abstract

Causality from the capital account (KA) to the current account (CA) of the balance of payments indicates disruption from capital flows while the reverse can indicate smooth financing of the CA that allows investment to exceed domestic savings. A three-variable vector autoregression tests for Granger causality between the Indian CA, KA, KA components, and gross fixed capital formation (GFCF) over 2000–01Q1 to 2015–16Q3. Since a CA deficit indicates an excess of investment over savings it is useful to estimate which type of capital flows affect investment. No causality is found to exist in any direction between the KA and the CA. There is only indirect causality through some components. Of the capital flow components, only FDI affects GFCF. The latter consistently affects the CA. The CA affects debt portfolio flows and non-resident deposits, suggesting these were used to finance the CA, but they were not causal for GFCF. Volatile flows, therefore, did not deteriorate the CA, but they also did not contribute to GFCF. India’s gradual KA convertibility may have mitigated shocks from the KA. Long-term sustainability, however, requires FDI to increase as compared to other types of flows. JEL Codes: F21, F32

Suggested Citation

  • Ashima Goyal & Vaishnavi Sharma, 2019. "Estimating the Relationship Between the Current Account, the Capital Account and Investment for India," Foreign Trade Review, , vol. 54(1), pages 29-45, February.
    • Handle: RePEc:sae:fortra:v:54:y:2019:i:1:p:29-45
    DOI: 10.1177/0015732518810832
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    References listed on IDEAS

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    Cited by:

    1. Md. Hasanur Rahman, 2023. "Does the current account balance influence foreign direct investment in the Indian economy? Application of quantile regression model," SN Business & Economics, Springer, vol. 3(5), pages 1-18, May.
    2. Tanveer Ahmad Khan, 2022. "Current and Capital Account Dynamics in India: An Empirical Analysis of the Post-Reform Period," Foreign Trade Review, , vol. 57(1), pages 41-65, February.

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    More about this item

    Keywords

    Current account; capital account; balance of payments; Granger causality; gross fixed capital formation;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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