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Role of External Factors in Gross Capital Flow to India: A VECM Approach

Vol 10 , Issue 1 , January - June 2023 | Pages: 15-44 | Research Paper  

 
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https://doi.org/10.17492/jpi.pragati.v10i1.1012302

Published Online: June 15, 2023


Author Details ( * ) denotes Corresponding author

1. * Shikha Malhotra, Research Scholar, Commerce and Management, Jain (deemed-to be-University), Bangalore, Karnataka, India (shikha.ahuja2013@gmail.com)
2. Chaya Bagrecha, Professor, Management, CMS Business School, Bangalore, Karnataka, India (drchayabagrecha@cms.ac.in)

India entered into the phase of financial integration and liberalization in the 1990s. Since then, it has attracted a large number of capital flows. The volatility of these flows, in the short term might encourage exchange rate volatility, sudden outflows, financial cycles, and disruption of business cycles. The surge and sudden reversals of capital flow to Emerging Market Economies after accommodative policy measures undertaken by the advanced economies (particularly the U.S) after the global financial crisis have once again renewed the interest in determinants of capital flows. For this purpose, this study focuses on finding the role of global shocks in determining the direction of capital flow movements in India. The study uses quarterly data for a period of 20 years (from 2000-2019) and estimates an empirical model based on VECM (Vector Error Correction Model) approach. The empirical results show the importance of global factors in driving the gross flow movements to India.

Keywords

Global factors; Capital flows; Indian economy; Gross inflows; VECM

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