Trends and determinants of raising ECBs in Indian Context

This study examines the effect of capital control measures initiated during the last two decades in terms of all-in-cost ceilings and enhanced limits on ECB in India over the sample period 2004Q1 to 2020Q2. Using global liquidity, the exchange rate between INR/USD, imports and interest rate differentials as control variables and changes in capital control measures from 2008 to 2011 in the all-in-cost ceiling, and changes in the enhanced limits on ECBs from USD 500 million to USD 750 million under the automatic route in 2012, regression analysis of three ECB series show interesting results. Using Robust Least Squares method, we document that (1) the successive increment in all-in-cost ceilings on ECB from 2008 to 2011 is inducing ECBs to flow, indicating that Indian firms benefit more than they pay due to increase the cost for ECBs having maturities 3<5 years. However, such capital control measures are not effective on ECBs having maturities >5 years. (2) The effect of the enhanced limits on ECBs from USD 500 million to USD 750 million under the automatic route in 2012 has a pronounced impact on ECB, averaging 1602.1 USD million per quarter. We observed that CCAs in India are initiated in response to the volatility of the exchange rate and global liquidity, imports, and interest rate differentials are significant variables in India's required capital control actions.

The nexus between the exchange rates and interest rates: evidence from BRIICS economies during the COVID-19 pandemic

Purpose This paper aims to investigate whether the interest rate differentials Granger cause expected change in the exchange rate during the COVID-19 period. The study examines if the investors in the international assets and exchange rate markets take advantages of the relevant information obtained during the COVID-19 pandemic. Design/methodology/approach This paper used daily data ranging from January 31, 2020 to June 30, 2020 and considered BRIICS economies. The study implemented the Toda–Yamamoto’s Granger causality approach to identify the causality between interest rate differentials and exchange rates. For robustness checks, the study used ARLD short-run dynamics to infer causal relations. Findings Overall, the results indicate that the interest rate differentials improve the predictability of subsequent exchange rate changes in all six BRIICS economies during the COVID-19 period wherein investors are forward-looking. The empirical results pass the robustness checks. Originality/value There is a lack of studies exploring the relationship between interest rate differentials and exchange rates in the presence of an unanticipated event such as the current pandemic. To the best of the authors’ knowledge, this is the first study to explore the causal linkages between interest rate differentials and expected change in exchange rates, focusing on the COVID-19 outbreak period.