An empirical analysis of macroeconomic determinants of foreign fund inflows in India

Imran Khan

Journal of Financial Economic Policy, 2025, vol. 18, issue 1, 155-180

Abstract: PurposeThis study aims to explore how changes in economic policies can influence a country’s foreign fund inflows.Design/methodology/approachFocusing on three primary sources of foreign fund inflows – remittance inflows, foreign direct investment (FDI) and foreign portfolio investment – the research uses a time-series dataset spanning from 1991 to 2023. It examines the impact of macroeconomic variables on these inflows and uses scenario analysis to predict the effects of potential policy changes during the forecast period from 2024 to 2030.FindingsThis study reveals that FDI is positively influenced by gross domestic product (GDP) growth, trade openness and a favorable current account balance, while higher interest rates and stronger exchange rates hinder FDI growth. Similarly, remittance inflows are positively affected by GDP growth, higher exchange rates and trade openness but are negatively impacted by a strong current account balance. For portfolio investments, the positive influences include GDP growth, trade openness and a favorable current account balance, whereas higher interest rates and stronger exchange rates negatively affect growth. Moreover, this study suggests that if policymakers implement economic policy changes, trade openness and exchange rate stability could significantly enhance FDI and remittance inflows during the 2024–2030 period, with portfolio investment growth benefiting more from an improved current account balance.Originality/valueThis research contributes to the literature by developing a comprehensive model for forecasting foreign fund inflows to India, an area that has been relatively underexplored. It provides crucial insights into the effects of economic policy changes on FDI, remittances and portfolio investments, thereby enriching the understanding of these dynamics. In addition, this study offers actionable guidance for policymakers to optimize economic policies for attracting foreign investments. On a global scale, it informs investors and financial institutions about the potential impacts of macroeconomic policy changes in emerging markets, facilitating strategic investment decisions and enhancing global financial forecasting.

Keywords: Economic policy; Remittances; Foreign direct investment; Portfolio investment; India (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-10-2024-0304

DOI: 10.1108/JFEP-10-2024-0304

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