Causal Relationship Between Foreign Capital Inflows And Indian Economy: Empirical Evidence

Journal Name: 
Journal of Banking, Information Technology & Management
Volume: 
Vol. 14 - No. 1
Authors: 
Author Name Designation Organization
Arwinder Singh
Kamalpreet Kaur Sandhu
Abstract: 

This paper is attempted to examine the relationship between foreign capital inflows and Indian economy. The present study is based on monthly data for the period ranging from April 1998 to March 2015 on the various macro-economic variables, namely, foreign capital inflows (CI), Export, Import, Foreign Exchange reserves, wholesale price Index, Index of Industrial production as a proxy of GDP (IIP), Real Effective exchange Rate (REER), BSE Sensex, Exchange Rate and Openness. Augmented Dickey Fuller test of unit root and Granger Causality test has been applied to analyze the data. The result indicated that Openness, Index of industrial production, Export, Foreign exchange reserve, exchange rate granger cause foreign capital Inflows. It states that causality is running from these macro- economic variables to foreign capital inflows in India. On the other hand, foreign capital inflows causes real effective exchange rate (REER) and BSE Sensex. While, there is bi-directional causality prevailing between import and foreign capital inflows. There is no  causality running between Wholesale price index and foreign capital inflows. To achieve the desired macro-economic goals, efforts should be made to reduce the inflation rate and focus more on trade openness and growth which ultimately built investors' confidence in the capital
market.