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An empirical examination of the effect of domestic monetary policy on external commercial borrowings to India

Author

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  • Virender Kumar

    (Delhi Technological University)

  • Poonam

    (University of Delhi)

Abstract

This paper empirically examines the effect of domestic monetary policy shock on external commercial borrowings (ECBs) to India for the period 2000:Q2 to 2019:Q4. The impact of domestic monetary policy shock on ECBs is assessed using two variables: interest rate differential and domestic money supply growth. The paper employs a structural VAR model and utilizes impulse response functions and forecast error variance decomposition analysis to derive empirical results. The empirical results based on impulse response functions indicate that the interest rate differential has a positively significant effect on external commercial borrowings to India, while the effect of domestic money supply growth is found to be negative. The forecast error variance decomposition analysis indicates that the interest rate differential explains about 14.6% and domestic money supply growth explains about 2% of the total variation in external commercial borrowings, implying that domestic monetary policy variables together explain about 16.6% of the total variation in ECBs to India. The results suggest that the central bank, through monetary policy interventions, can influence and manage the flow of external commercial borrowings to India. Furthermore, the study finds that the exchange rate, domestic industrial activity, domestic output growth, domestic country’s creditworthiness, and domestic macroeconomic instability are other significant determinants of external commercial borrowings.

Suggested Citation

  • Virender Kumar & Poonam, 2024. "An empirical examination of the effect of domestic monetary policy on external commercial borrowings to India," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 14(3), pages 641-661, September.
    • Handle: RePEc:spr:eurase:v:14:y:2024:i:3:d:10.1007_s40822-024-00275-x
    DOI: 10.1007/s40822-024-00275-x
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    More about this item

    Keywords

    Monetary Policy; External Commercial Borrowings; Interest rate differential; SVAR; India;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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