Foreign Direct Investment and Exchange Rate in India

Al Barkat Journal of Finance and Management. Vol. 2, No. 4, pp.18-34

17 Pages Posted: 2 May 2013

See all articles by Durairaj Kumarasamy

Durairaj Kumarasamy

Consultant, ASEAN India Centre, Research and Information System for Developing Countries

Date Written: July 1, 2010

Abstract

The present article attempts to identify the causal nexus among real exchange rate (RER), its volatility and foreign direct investment (FDI) inflows in India using quarterly data from 1990:II to 2008:I. Generalized Auto Regressive Conditional Heteroscedasticity (GARCH) model is employed to obtain conditional variance of RER data series. Besides, Johansen’s cointegration technique followed by the vector error correction model (VECM) is employed to examine the objective. The analysis reveals a long run relationship among FDI, RER and the GARCH measure of exchange rate volatility, and also a short run causality flow from RER and its volatility to FDI. However, we find no discernible link from FDI to RER and its volatility in the short run. Thus, the study concludes that depreciation in exchange rate level leads to increase in inflow of FDI, and an increase in FDI is due to decreases in exchange rate uncertainty in the short run.

Keywords: Foreign Direct Investment, Exchange Rate, Volatility

JEL Classification: C32, F21, F31

Suggested Citation

Kumarasamy, Durairaj, Foreign Direct Investment and Exchange Rate in India (July 1, 2010). Al Barkat Journal of Finance and Management. Vol. 2, No. 4, pp.18-34, Available at SSRN: https://ssrn.com/abstract=2259233

Durairaj Kumarasamy (Contact Author)

Consultant, ASEAN India Centre, Research and Information System for Developing Countries ( email )

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