INTERPLAY BETWEEN FOREIGN INVESTMENT INFLOWS AND MACROECONOMIC FACTORS

Abstract

  The study is an attempt to discover the mutual interactions between Indian rupee exchange rate and foreign financial investment inflows in the form of foreign direct investment and foreign institutional investors’ investment using Autoregressive Distributed lag framework based on monthly data from January 2008 to December 2021. The long-run ARDL estimates revealed that a hike in domestic interest rate, foreign inflation, foreign direct investment and FIIs investment inflows lowers the exchange rate, i.e., causing rupee appreciation and vice versa. However, domestic inflation and foreign interest rate are directly and positively linked with rupee exchange rate which signifies that a rise in domestic inflation and foreign interest rate raises the Indian rupee exchange rate and thus cause rupee depreciation and vice versa. The Granger causality results further highlighted that rupee exchange rate and FIIs investment are active players since both cause each other. But, for FDI and exchange rate of rupee, FDI is proactive and cause Indian rupee exchange rate while exchange rate of rupee does not cause FDI.

Keywords: Foreign Direct Investment, Foreign Institutional Investors’ Investment, Indian Rupee Exchange Rate, Investment Inflows.

JEL Classification Code: F21, G11, G24.