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Capital Flows and Exchange Rates: The Indian Experience

In: Perspectives on Economic Development and Policy in India

Author

Listed:
  • Pami Dua

    (University of Delhi)

  • Partha Sen

    (University of Delhi)

Abstract

This paper examines the relationship between real exchange rate and the level as well as volatility of capital flows for the Indian economy for the period 1993Q2 to 2010Q4. Other variables include fiscal policy, monetary policy and external balance indicators. Estimation results indicate that the variables are co-integrated and each Granger-causes the real exchange rate. The generalized variance decompositions show that determinants of the real exchange rate, in descending order of importance include net capital inflows and their volatility (jointly), government expenditure, money supply and the current account surplus. An analysis on similar lines is also performed for the foreign exchange reserves held by the Reserve Bank of India.

Suggested Citation

  • Pami Dua & Partha Sen, 2017. "Capital Flows and Exchange Rates: The Indian Experience," India Studies in Business and Economics, in: K.L. Krishna & Vishwanath Pandit & K. Sundaram & Pami Dua (ed.), Perspectives on Economic Development and Policy in India, chapter 0, pages 193-216, Springer.
    • Handle: RePEc:spr:isbchp:978-981-10-3150-2_8
    DOI: 10.1007/978-981-10-3150-2_8
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    Cited by:

    1. O. P. C. Muhammed Rafi & M. Ramachandran, 2018. "Capital flows and exchange rate volatility: experience of emerging economies," Indian Economic Review, Springer, vol. 53(1), pages 183-205, December.
    2. Özcan KARAHAN & Olcay ÇOLAK, 2019. "The link between financial capital movements and the exchange rate in Turkey," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 10, pages 263-281, December.
    3. Sayantan Bandhu Majumder & Ranjanendra Narayan Nag, 2016. "Understanding the Behaviour of Capital Flow and its Components: The Indian Experience," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 10(3), pages 355-380, August.
    4. Eita, Joel Hinaunye & Khumalo, Zitsile Zamantungwa & Choga, Ireen, 2020. "Empirical test of the Balassa-Samuelson effect in selected African countries," MPRA Paper 101495, University Library of Munich, Germany.

    More about this item

    Keywords

    Real exchange rate; Capital flows; Foreign exchange reserves; Co-integration;
    All these keywords.

    JEL classification:

    • 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
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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