ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Changing Contours of Capital Flows to India

The Indian experience with capital flows during the period 1950s to the first decade of this century reveals a paradigm shift from a prolonged period of capital scarcity to one of surplus, however characterised by a volatile pattern of inflows. The key structural aspects include a significant shift from official to private capital flows and from debt to non-debt flows. Non-resident Indian deposits show considerable sensitivity to interest and exchange rate fluctuations. The corporate preference for overseas borrowings is predominantly influenced by domestic activity; but the persistence of interest rate arbitrage and global credit market shocks also have a significant impact. Foreign institutional investment inflows and stock prices have a bidirectional causal relationship with a time varying nature of the stock price volatility. Volatile capital flows rather than trade flows seem to drive real exchange rate movements with consequences for the real economy.

The views expressed are the authors personal views and not those of the Reserve Bank of India.

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