EconPapers    
Economics at your fingertips  
 

Estimating the Relationship Between the Current Account, the Capital Account and Investment for India

Ashima Goyal and Vaishnavi Sharma

Foreign Trade Review, 2019, vol. 54, issue 1, 29-45

Abstract: Causality from the capital account (KA) to the current account (CA) of the balance of payments indicates disruption from capital flows while the reverse can indicate smooth financing of the CA that allows investment to exceed domestic savings. A three-variable vector autoregression tests for Granger causality between the Indian CA, KA, KA components, and gross fixed capital formation (GFCF) over 2000–01Q1 to 2015–16Q3. Since a CA deficit indicates an excess of investment over savings it is useful to estimate which type of capital flows affect investment. No causality is found to exist in any direction between the KA and the CA. There is only indirect causality through some components. Of the capital flow components, only FDI affects GFCF. The latter consistently affects the CA. The CA affects debt portfolio flows and non-resident deposits, suggesting these were used to finance the CA, but they were not causal for GFCF. Volatile flows, therefore, did not deteriorate the CA, but they also did not contribute to GFCF. India’s gradual KA convertibility may have mitigated shocks from the KA. Long-term sustainability, however, requires FDI to increase as compared to other types of flows. JEL Codes: F21, F32

Keywords: Current account; capital account; balance of payments; Granger causality; gross fixed capital formation (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://journals.sagepub.com/doi/10.1177/0015732518810832 (text/html)

Related works:
Working Paper: Estimating the Relationship between the Current Account, the Capital Account and Investment for India (2017) Downloads
Working Paper: Estimating the relationship between the current account, the capital account and investment for India (2017) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sae:fortra:v:54:y:2019:i:1:p:29-45

DOI: 10.1177/0015732518810832

Access Statistics for this article

More articles in Foreign Trade Review
Bibliographic data for series maintained by SAGE Publications ().

 
Page updated 2025-03-19
Handle: RePEc:sae:fortra:v:54:y:2019:i:1:p:29-45