Macroeconomic Implications of Capital Inflows in India

The study attempts to analyse the behaviour of some macroeconomic variables in response to total capital inflows in India using quarterly data for the period 1994Q1-2007Q4. Time trend of all variables except nominal effective exchange rate-both export and trade based and current account balance shows instability over the period of study. Current account balance is the only variable which is stationary in level form all other variables are stationary in first difference form. Cointegration test confirms the long run equilibrium relation between total capital inflows (TCI) and real effective exchange rate-both trade based and export based and between TCI and nominal effective exchange rate-export based. Granger causality test confirms the bidirectional causality between real effective exchange rate-export based and TCI and between foreign exchange reserve & TCI and unidirectional causality from TCI to real effective exchange rate-trade based.