A Study of Capital Flows on Exchange Rate in India | Original Article

ABSTRACT:

The aim of this study is to the study attempts to understand capital impact trends and patterns in India and explores the empirical relationship between capital influxes and volatility in exchange rates between 1991 and 2013. The report also aims to include some policy recommendations to stabilize India's currency and capital inflows. With massive flows of capital in and out of the country, exchange rate management is difficult. India has worked hard over the last two decades to liberalize capital markets and made tremendous progress. India has increased FDI controls in different industries and allowed direct ODI and FII outward investment. The free market system needs liberalization of capital accounts). It is very clear that India is committed and eager to work towards this goal. Around the same time, the regulation of money laundering, terrorist funding and irregular movements of capital requires macro prudential protection measures. The analysis helped to explain the effects of capital flows and control of exchange rates. This study examines at foreign capital influx trends and patterns in the Indian economy and seeks to explain the relationship between capital flow and currency volatility. Global institutional (FII) influxes are highly unpredictable and are increasingly propensity to reverse capital if the possibility of macro-economic policy changes or economic growth and financial sector changes from within or outside the country is small. Changes in the country's or currencies economic situation lead to major capital shifts, often rapidly if financial capital is involved. Their propensity to overheat asset prices, loss of export competitiveness, and exposure to financial crises pose serious challenges for policy-makers. Capital inflows are positively correlated with the recipient countries' exchange rate appreciation. Portfolio investment flows, international loans, foreign assistance and foreign trade flows typically have a major impact on the exchange rate, whereas foreign direct investment-related capital inflows do not significantly influence the exchange rate.