Relationship of Foreign Direct Investment (FDI) Inflows and Exchange Rate in the Context of India: A Two Way Analysis Approach

Abstract

This paper analyses interdependency of Foreign Direct Investment (FDI) inflow and exchange rate from the perspective of Indian economy. To determine the relationship between these two time series data, Granger Causality Test (GC Test) is applied. Before applying GC test, time series data are subjected through Augmented Dicky Fuller Test (ADF) to achieve stationarity of the variables. From the GC test, it is observed that the FDI inflow with lag period 1 and 2 jointly show causality on exchange rate with a probability value: 49.57%. Similarly, exchange rate with lag period 1 and 2 jointly show causality on FDI inflow with a probability value: an 8% .The probability value shows that there is insignificant effect of FDI inflow on currency exchange rate. However, it can be interpreted as the existence of a causal relationship of exchange rate on FDI inflow. This experiment is conducted on twenty five years, time series data from 1991-2016 extracted from secondary data source.