Macroeconomic Effects of Capital Account Liberalisation in India

Abstract

In this article, we examined the macroeconomic effects of capital account liberalisation in India. Econometric analyses based on annual data for the period 1993–1994 to 2012–2013 reveal a number of interesting observations. The conclusion drawn is that there exist a unique long-run relationship between economic growth and capital account openness. The long-run relationship was also observed between capital account openness and gross domestic capital formation (GDCF), and between capital account openness and real effective exchange rate (REER). Results of the cointegration test are indicative of the fact that the increased inflows of private foreign capital in India since 1993 might account for the disturbances in the equilibrium relationship between numbers of macroeconomic variables. From the causality analysis it was observed that capital openness must be preceded by trade openness and a more developed domestic financial system.JEL Classification: F10, F15, F32, F36, O43, G21