Abstract:
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
variables. But the dependence of each I(1) variable on FINV invalidates
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.
