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Current and Capital Account Dynamics in India: An Empirical Analysis of the Post-Reform Period

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  • Tanveer Ahmad Khan

Abstract

This article analyses the dynamics between current account (CA) and capital account in post-liberalisation India. Contemporaneous occurrence of CA deficit along with capital account surplus suggests the possible causal relationship between the two accounts. The theoretical debate around capital account liberalisation (KAL) is developed with the intention to lend support to empirical results for policy formulation. The analysis of arguments for and against KAL liberates us in interpreting the empirical results. Within the framework of KAL, this article proceeds to estimate the relationship between current and capital account. A set of econometric tests are performed on an Indian quarterly data over the period from 1996 to 2018. Econometric analysis reveals that capital account affects CA negatively. Short-run capital and debt flow also affect CA negatively, while foreign direct investment (FDI) affects it positively. We find debt flow to be an important factor, contributing to CA imbalance. Such dynamics is critical for any decision about KAL. From the analysis, it is observed that India needs to encourage FDI, while maintaining strict control over short-term capital, which is highly disruptive, and proceed cautiously towards full KAL. JEL Codes: C32, F21, F32

Suggested Citation

  • 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.
    • Handle: RePEc:sae:fortra:v:57:y:2022:i:1:p:41-65
    DOI: 10.1177/00157325211037101
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    More about this item

    Keywords

    Capital account; current account; interest rate; capital flows; cointegration; Granger causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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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