External Commercial Borrowings in India and its Sensitivity to Macroeconomic Factors: An Empirical Analysis

Abstract

The share of external commercial borrowing (ECB) in the total external borrowing is rising in India. The government is also progressively relaxing the rules to raise ECB. The present study empirically examines ECB in India and its relationship with the exports, imports, index of industrial production (IIP), foreign investment (FI), exchange rate (ER) and interest rate differential (IRD) for the period September 1999 to September 2012 on a quarterly basis. It also tries to ascertain the cost of ECB, which normally is believed to be cheaper, against the three currencies like US Dollar (USD), Japanese Yen (JPY) and Great Britain Pound (GBP) for the period 1978-2011.The methodology adopted for this study is based on the application of time series econometrics. It is observed, on application of Augmented Dicky Fuller Tests and Philips Pheron tests, that the time series of each variable is non-stationary at level and stationary at first difference and, therefore, is subjected to the analysis as a Vector Error Correction Model (VECM). From the cointegrating vector it is found that there is a significant long term positive relationship with IIP, IRD and ER and a negative relationship with imports and FI. In the short run, imports, IRD, ER and FI have positive relationship with ECB, while exports and IIP show a negative relationship. The Granger causality tests show that there is a unidirectional causality. The variance decomposition analysis shows that most of the movements in ECB are explained by the interest rate differential followed by the index of industrial production. The ECB in JPY has been found to be cheaper than in the GBP or in USD in most of the years.