The Causality Between Foreign Portfolio Investment Inflow and Call Money Rate in India: An Application of Auto Regressive Distributed Lag Modelling and Granger Causality Approach

This article attempted to investigate a causality between Foreign Portfolio Investment Inflow and Short run Interest rate in India for the monthly data between the period of 2006-2017 by Auto Regressive Distributor Lag (ARDL) Model. The study proved the existence of a long run cointegration between these two variables for the given period. The long run coefficient of ARDL was significant and it explained a decrease in the short run interest rate will bring Foreign Portfolio Investors in India. The impulse response function also showed the negative relationship between the variables. The study also found out that there was 37 percent chance of the short run disequilibrium between the variables to move back to long run stable equilibrium through Error Correction Term. Surprisingly, in short run, there was no Granger Causality between the two variables. Finally, the analysis revealed that Foreign investors who were interested to invest in India for less than five years are influenced by the movement of the call money rate which was immediate and specified for less than twenty-four hours in India. It proved the hot money nature of Foreign Portfolio Investment in Indian economy.