Foreign Direct Inflows and Impact of Credit Policy with respect to India: A Review

Abstract

This paper investigates reaction of Indian credit policy to foreign financial inflows. For this sterilization coefficient which measures degree of independence of domestic credit policy is calculated by analyzing monthly data on net foreign exchange assets, net domestic assets, month end exchange rate of Indian rupee in terms of US dollar, index for industrial production, wholesale price index as endogenous variables and monthly dummies as exogenous variables. The present study uses the data for the period from May 1993 to December 2005. The study found that value of ‘sterilization coefficient’ based on ‘vector error correction model’ implies only partial sterilization of domestic credit policy to control adverse impact on domestic inflation of foreign financial inflows. The study concludes that credit policy is neither completely independent nor fully sterilized from the impact of foreign financial inflows. The study suggests that monetary authorities should work out policies for reducing the adverse impact of foreign financial inflows.

DOI - https://doi.org/10.65525/SVUP.9788199651593.2025.23-38