This paper studies multivariate dynamic analysis of capital inflows in relation with domestic bank’s credit which has not been investigated earlier adequately in the context of Indian economy. Using autoregressive distributed lag (ARDL) model, we find the existence of co-integration over the period 1991 Q3 to 2022 Q1. The long-run ARDL regression model results show net equity inflows, i.e. net foreign direct investment, and net non-equity inflows, i.e. foreign loan, are significant to influence domestic bank credit. Result also reveals that depreciation of exchange rate and current account (trade) deficit increase bank credit. Outcome of this research contributes significantly to frame effective monetary policy in the Indian context.
During the 1990s and early 2000s, it was a widely adopted global practice to utilize interest rates as a means to stabilize inflation and output, with the aim of addressing financial imbalances. However, the Global Financial Crisis and the recent pandemic challenged this consensus, leading to a heated debate over the appropriate role of monetary policy. This motivated us to hypothesis the nexus between monetary policy shocks and financial imbalances against the backdrop of economic policy uncertainty (EPU) in India. We have used the principal component analysis method to construct a financial index using critical financial variables. The index is further used to derive financial imbalances. The relation between financial imbalance and monetary policy shock is found to be negative and statistically significant during 2008-2012, generally marked as a period of high EPU caused by the great depression of 2008. Afterwards, the phase of moderation persists until 2019 and the arrival of recent pandemic. However, during the pandemic, the EPU has escalated and strengthened the positive relationship between financial imbalance and monetary policy. Overall, the findings of this study indicate that EPU plays a significant role in the interplay between monetary policy and financial imbalance. In terms of policy implications, our findings suggest that monetary policy is ineffective in preserving financial stability during periods of high uncertainty, and hence policymakers should focus on alternative measures.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.