Trade and Foreign Institutional Investors (FII) Relationship in India

Abstract

The purpose of this study was to examine the causal relationship among Foreign Institutional Investments (FII), Trade Liberalization and Economic Growth in India for the period 1991-2018 with the help of half yearly data. We sued methodology i.e., co-integration, granger followed by unit root tests. The stationarityproperties of the data are found in the order of integration by using both the Augmented Dickey-Fuller (ADF) test and the Phillip-Perron (PP) test,variables tested stationary at first differences. The Johansen cointegrationis appliedto test for the long-run relationship among the variables and establish strong relations between growth, trade liberalization and FII. The Granger-causality test suggests that trade liberalization and economic growth does have causal impact on financial sector development; conversely trade has causal impact on growth and FII, implying support for trade-led growth and finance-led-growth.However, two importantpolicy implications of the analysis presented in this paper deserve attention.First, although FII has emerged as an important aspect of theeconomic growth strategy in the Indian context, since the sources of such an investment may be both domestic as well as external. Second, as documented in the econometric analysis,the complementarities between trade openness and FII appearto be useful in growth process.