An Empirical Study of Factors Affecting Balance on Capital Account in Post-liberalized Indian Economy

Abstract

The liberalization of Indian economy in the year 1991 brought in significant changes in its capital flows. Since then, understanding the factors affecting the balance on the capital account became important for policymakers and researchers. This study analyses the factors those affect the balance on the capital account in post-liberalized India. Variables for analysis are Balance on capital account, exchange rate, Gross fiscal deficit, interest rate, GDP growth rate and inflation. Annual data of these variables are taken from Database on Indian economy, RBI and World Development Indicator, World Bank for the period 1991-2022. Vector Autoregression (VAR) model has been used for the analysis. The empirical results indicate that Balance on capital account is influenced by exchange rate, inflation, gross fiscal deficit, interest rate and GDP growth rate. The findings of this research have important implications for policymakers, investors and researchers concerned with India's economic stability and growth prospects.