Economic recession capital inflow and exchange rate movements-an econometric study

This paper investigates ttie nature of the causal relationship between stock returns, net foreign institutional investment (Fll) and exchange rate in India. By applying the techniques of unit root tests, cointegration and the long-run Granger causality test proposed by Granger, we test the causal relationships using monthly data for the period April 2000 to March 2009. The major findings are that (a) a bi-directional causality exists between stock returns and the Fll, (b) unidirectional causality runs from change in exchange rate to stock returns (at 10% level of significance), not vice versa, and (c) no causal relationship exists between exchange rate and net investment by Flls.