Linkages Between Capital Inflows and Bank Credit in India

Abstract

The study tried to attempt a dynamic linkage between capital inflows and bank credit in case of India. The autoregressive distributed lag (ARDL) model was applied from 1994 Q1 to 2016 Q3. The result found that FDI, FPI and Foreign Loan affect domestic bank credit positively in the long run. Specifically, with a one per cent increase in FDI, FPI and foreign loans increased bank credit by 0.13, 0.76 and 0.22 per cent, respectively. Hence FPI had the maximum impact, followed by Foreign Loan and FDI. Furthermore, the result also revealed that raising the monetary base of the country also increases bank credit, but the exchange rate remains unaffected. Keywords: ARDL, capital inflows, cointegration, domestic bank credit. JEL Codes: E51, F33.