Impact of Macroeconomic Policies on the Balance of Payments of India during Inwardness and Openness

Eminent economists, policy makers and research scholars proved that there is an impact of each and every policy actions of macroeconomic policies (both monetary and fiscal policy actions) on the external sector variables like export and import of goods, services and capital flows via changes in prices, interest rates, gross domestic product and exchange rates. Degree of this impact may differ during inwardness and openness, according to IMF and IBRD. The present study attempts to analyse the impact of monetary and fiscal policy actions (money supply, Interest Rates, Gross Fiscal Deficit) on the external sector through BOP of India during inwardness and openness using appropriate statistical methods like OLS and other descriptive statistics. This study finds that the impact of expansionary policy actions on the external sector during inwardness was limited and stable because the policy actions are mainly based on economic planning. But the same policy actions and its influence on the external sector during openness was highly volatile due to the pressure of global economic factors in the policy making process. For economic stabilisation and external sector sustainability, this study strongly recommends Milton Friedman's monetary rule and IMFs macroeconomic stabilisation measures.