Global Liquidity And Foreign Portfolio Investment- How Are They Tied Up With Indian Macroeconomic Indicators?

Abstract

Global liquidity has a sincere concern with respect to an economy’s growth. Here, the country’s macroeconomic indicators play a major role in directing and channelising the liquidity in correct direction towards upliftment of the health of the economy. In this respect, also, Foreign Portfolio Investment (FPI) is considered as the key driver of the economy. Hence, the focus of the research is to measure the nexus between global liquidity, main indicators of economy and FPI for India applying Auto Regressive Distributed Lag (ARDL) model. Apart from Global Liquidity (EFFR) as one of the regressors, this paper considers following Indian macroeconomic variables as other regressors - Index of Industrial Production (IIP), Large Cap Index (LC), Mid Cap Index (MC), Small Cap Index (SC), Long run Money supply(M3), Nominal Exchange Rate (NER), Short Run Interest Rate (less than twenty-four hours) (SINT), and trade openness (TO). The study starts with proving a long run cointegration between the dependent variable FPI and above mentioned regressors through Bound Testing Approach. Among the long run coefficients, LC affects FPI in India significantly. While analysing the short run causality, apart from EFFR and TO all other regressors show significant impact on FPI. Additionally, the Granger Causality test also substantiates short run observations of ARDL i.e. IIP, LC, MC, SC, M3, NER, and SINT granger cause FPI. The result shows unidirectional causality proving the absence of any cyclic relationship due to dependent variable granger causing the regressors. Following are the conclusions – (1) the paper finds out the ‘hot-money’ nature of FPI by observing absence of impact of any regressors (except LC) in the long run at 5% significance level.  The same conclusion is corroborated by presence of impact of almost all regressors in the short run at equivalent significance level. (2) It is surprising to find out that global liquidity has no impact on FPI in the short run. Rather, India’s internal macro-economic variables have higher influence in attracting FPI. (3) There is contradiction to the theoretical expectation that FPI would influence country’s macro-economic variables – specifically, FPI inflow in India has no short-term causal effect on volatile variables like equity indexes and currency exchange rate.