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Understanding the Behaviour of Capital Flow and its Components: The Indian Experience

Sayantan Majumder () and Ranjanendra Narayan Nag

Margin: The Journal of Applied Economic Research, 2016, vol. 10, issue 3, 355-380

Abstract: The article analyses the behaviour of net total capital inflow and its components since the introduction of liberalisation in India in 1991. An introspective analysis of capital flow reveals that capital inflow in India is volatile in nature and it is volatile in exactly the wrong direction, in a sense that it is pro-cyclical rather than countercyclical. However, all types of flows should not be treated equally. Being the most volatile and least persistent components, FPI and commercial bank inflow should be monitored very cautiously. The volatility of foreign direct investment (FDI) and commercial borrowing has gradually increased, although it has declined recently. External assistance has declined steadily and lost its dominance relative to the other counterparts. There is ample evidence of complementarity among the components of capital flows though we get a glimpse of substitutability between FDI and FPI—the two most voluminous components of capital flows. Contrary to a-cyclical, non-debt creating flows, commercial borrowings and commercial bank flows are found to be pro-cyclical in nature. The net total capital inflow series contain three structural breakpoints, at 1995Q4, 2002Q4 and 2006Q2. Domestic growth performance, policy changes and external shocks are the key factors behind these obtained structural breaks. There was a noticeable change in the behaviour of total capital flow and its components over the four phases identified in the article. JEL Classification: F21, F32, F41

Keywords: capital flows; volatility; persistence; substitutability; cyclicality; structural breaks (search for similar items in EconPapers)
Date: 2016
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