Capital Flows and Exchange Rates: The Indian Experience

Pami Dua and Partha Sen
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Partha Sen: Department of Economics, Delhi School of Economics

Indian Economic Review, 2013, vol. 48, issue 1, 189-220

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 cointegrated 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.

Keywords: Real exchange rate; Capital flows; Foreign exchange reserves; Cointegration (search for similar items in EconPapers)
JEL-codes: C32 F31 F41 (search for similar items in EconPapers)
Date: 2013
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