Economic reforms, capital inflows and macro economic impact in India
The study attempts to explain the effects of inflows of private foreign capital on some major macroeconomic variables in India using quarterly data for the period 1993-99.The analyses of trends in private foreign capital inflows and some other variables indicate instability. Whereas net inflows of private foreign capital (FINV),foreign currency assets,wholesale price index,money supply,real and nominal effective exchange rates and exports follow an I(1)process,current account deficit is the only series that follows I(0).Cointegration test confirms the presence of long-run equilibrium relationships between a few pairs of such cointegration except in two cases:cointegration exists between foreign currency assets and money supply and between nominal effective exchange rate and exports,even after controlling for FINV. The Granger Causality Test shows unidirectional causality from FINV to nominal effective exchange rates-both trade-based and export-based-, which raises concern about the RBI strategy in the foreign exchange market. Finally, instability in the trend of foreign currency assets could be partially explained by the instability in FINV with some lagged effect.
|Date of creation:||Jan 2001|
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