An Empirical Analysis of Exchange Rate Volatility and Foreign Investment Inflows from the Post-Reform Period to 2020 in India

Abstract

The paper empirically examined the impact and relationship between exchange rate volatility and foreign investment inflow in India. The parameters selected to examine the impact and relationship are exchange rate volatility and foreign investment inflow. The analysis was carried out using time series data of thirty years from the period of 1990 to 2020. For the methodology, we used the Augmented Dickey-Fuller (ADF) stationarity test for unit roots. Viewing the stationarity test, we got our data is stationary at first difference with intercept. After that, the Engel Granger cointegration test is conducted to check the relationship, and finally VAR model is constructed to know the significance of the coefficient of the model. Here we reject the null hypothesis and get that data is highly significant at 1%, 5% and 10% level of significance. The study finds that there is a short-run relationship between exchange rate volatility and foreign investment inflow but there is a high impact of exchange on capital inflow in India.