Do Exchange Rate and Its Volatility Deter Foreign Direct Investment (FDI)  to India?

Kumarasamy, Durairaj; Velan, Nirmala

doi:10.2139/ssrn.2265267

Do Exchange Rate and Its Volatility Deter Foreign Direct Investment (FDI) to India?

Kumarasamy, Durairaj and Velan, Nirmala. (2012), "Do Exchange Rate and its Volatility deter Foreign Direct Investment in India?”, Indian Economic Journal, Vol. 60, No. 1, April-June, 2012, pp. 124-138.

17 Pages Posted: 15 May 2013 Last revised: 31 Oct 2013

See all articles by Durairaj Kumarasamy

Durairaj Kumarasamy

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

Nirmala Velan

Pondicherry Central University

Date Written: April 1, 2012

Abstract

This paper investigates the impact of exchange rate levels and its volatility on Foreign Direct Investment in India using quarterly data for the period 1996:2 to 2010:1. The study employed autoregressive distributed lag (ARDL) bounds testing approach to examine the long-run and short-run relationship. Both conditional variance and other measures of volatility have been used to generate exchange rate volatility. The study also considered factors that motivate the foreign investors’ decision to invest in India. The results indicated that exchange rate volatility deters FDI in India, suggesting that flexible but stable exchange rate system may be needed to successfully attract FDI inflows in India.

Keywords: Foreign Direct Investment, Exchange Rate, Volatility, ARDL

JEL Classification: F21, F41

Suggested Citation: Suggested Citation

Kumarasamy, Durairaj and Velan, Nirmala, Do Exchange Rate and Its Volatility Deter Foreign Direct Investment (FDI) to India? (April 1, 2012). Kumarasamy, Durairaj and Velan, Nirmala. (2012), "Do Exchange Rate and its Volatility deter Foreign Direct Investment in India?”, Indian Economic Journal, Vol. 60, No. 1, April-June, 2012, pp. 124-138., Available at SSRN: https://ssrn.com/abstract=2265267 or http://dx.doi.org/10.2139/ssrn.2265267