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Factors Associated with Growth in India’s International Reserves: VECM Analysis

Author

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  • Latha Sreeram
  • Samie Ahmed Sayed

Abstract

This study empirically examines the determinants of India’s international reserves in the long run and in the short run with seven other macroeconomic variables using the vector error correction model. The Johansen co-integration results indicate a positive long-run relationship between international reserves holdings and broad money M3 and foreign direct investment (FDI) inflows and negative relationship with external debt. The Granger causality test outcome also verifies the results, demonstrating that increase in broad money supply and FDI inflows are the reason for the accumulation in international reserves in India in the long run. M3 demonstrated a higher influence on international reserves suggesting that monetary policy is used widely in regulating the international reserves in India. This study also estimated the short-run dynamics and the tendency of the variables to reinstate to its long-run equilibrium. The error correction term coefficient entails a moderately low level of adjustment of international reserves holding, indicating that it is the other reason that the level of international reserves holding in India is high in the short run. JEL Codes: E51, F31, F41

Suggested Citation

  • Latha Sreeram & Samie Ahmed Sayed, 2023. "Factors Associated with Growth in India’s International Reserves: VECM Analysis," Foreign Trade Review, , vol. 58(3), pages 386-400, August.
    • Handle: RePEc:sae:fortra:v:58:y:2023:i:3:p:386-400
    DOI: 10.1177/00157325221103642
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    More about this item

    Keywords

    International reserves; broad money; FDI inflows; external debt; vector error correction model; Granger–Causality;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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