Nexus Between External Commercial Borrowings and Macroeconomic Variables in India – An Investigation

The external commercial borrowings (ECBs) is an instrument to raise the funds for the businesses from the foreign dealer banks by the Indian corporates. The ease of norms of ECBs in India had led to increase in ECBs over the past few years. Hence, it is pertinent to study the nexus between ECB and macroeconomic indicators impacting ECBs in India, so that the right measures may be adopted to regulate the economic indicators / ECBs for better management and governance.

There are various macroeconomic indicators which are possible factors conducive for rise in ECBs. These include consumer price index (CPI), index of industrial production (IIP – proxy for economic growth), exports, imports, exchange rate (ER) and Money Supply (MS). The secondary data on these variables is collected from the website of Reserve Bank of India (RBI) from January 2021 to October 2024. The study uses Vector Error Correction Model (VECM) approach.

The study found that there exists a short-run and long-run causality between various macroeconomic indicators and the ECBs. Granger causality test conrms the short-run causality between the IIP and the ECBs. The error correction term is found to be negative and signiant for dependent variable Import, indicating that there exists a short-run and long-run causality between the various macroeconomic indicators including ECBs with imports at 1% level of signiance with the speed of adjustment to shock at 2.7%.

The present policy of regulatory bodies to ease the norms of ECB are likely to change the landscape of India's growth trajectory. The study provides a perspective with regard to existence of nexus between the ECB and various macroeconomic indicators in India. Hence, the study suggests the measures to encourage ECBs in India by adopting certain macroeconomic prudence.