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AN EMPIRICAL INVESTIGATION OF CAUSALITY FROM CAPITAL FLOWS TO EXCHANGE RATE IN INDIA


Aditya Gaiha

PhD Research Scholar, Indian Institute of Technology, Bombay, India

Puja Padhi

Assistant Professor, Indian Institute of Technology, Bombay, India

A. Ramanathan

Professor, Indian Institute of Technology, Bombay, India


ABSTRACT

This study explores the relationship between capital flows and real exchange rates, with specific reference to India for the period July, 2005 to November, 2012. The period 2005 to 2012 has been a very interesting period for capital flows in India. This period has experienced periods of both very high and dwindling capital flows on account of global uncertainty following the global financial crisis post 2008. The study has taken the three major components of capital flows into India, namely, direct investment (which includes Foreign Direct Investment [FDI]), portfolio investment (which includes investment by Foreign Institutional Investors [FIIs]) and External Commercial Borrowings (ECBs which are primarily foreign currency denominated loans taken by Indian companies from overseas lenders). Some of the noteworthy findings of the study are FDI flows have no significant impact on the change in real exchange rates in India. However, portfolio flows and debt flows (ECBs) have a significant impact on the change in real exchange rates in India, during the period of study.


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