Relationship between Foreign Institutional Investment, Exchange Rate and Foreign Exchange Reserves: The Case of India Using ARDL Bounds Testing Approach

International Journal of Financial Management, Volume 4, Issue 2, April 2014

7 Pages Posted: 20 May 2014

See all articles by Niti Bhasin

Niti Bhasin

University of Delhi - Department of Commerce

Vartika Khandelwal

Independent

Date Written: April 2014

Abstract

Foreign institutional investment (FII) is believed to affect real economy of a country through its impact on factors such as exchange rates and foreign exchange reserves. Similarly, exchange rate movements are also believed to affect the FII coming to the country and foreign exchange reserves of the country. In the light of recent volatility in the movements of these variables, we examine the long-run and short-run relationship between these three variables. Using monthly data for the period September 1993 to July 2013, this paper employs the more recent and robust autoregressive distributed lag (ARDL) bounds testing approach to study the relationship among these three variables. The results indicate strong evidence of a long-run relationship between FII as dependent variable and exchange rate and foreign exchange reserves as independent variables. We also find exchange rate to be a significant determinant of FII movements.

Keywords: Foreign Institutional Investment, Exchange Rate, Foreign Exchange Reserves, ARDL Bounds Testing

Suggested Citation

Bhasin, Niti and Khandelwal, Vartika, Relationship between Foreign Institutional Investment, Exchange Rate and Foreign Exchange Reserves: The Case of India Using ARDL Bounds Testing Approach (April 2014). International Journal of Financial Management, Volume 4, Issue 2, April 2014, Available at SSRN: https://ssrn.com/abstract=2439077

Niti Bhasin (Contact Author)

University of Delhi - Department of Commerce ( email )

Department of Commerce, Delhi School of Economics
University of Delhi
Delhi, 110007
India

Vartika Khandelwal

Independent ( email )

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