International Capital Mobility and Saving-Investment Relationship in India

Abstract

This paper examines the Saving-Investment (S-I) relationship and the extent of capital mobility in India during the period 1970-2010. We find that S-I are cointegrated, but the error correction model exhibits structural instability on the onset of balance of payment crisis in the 1990s and currency devaluation period after 2000. The interactive dummy variables reveal that the current period-pass through of savings to investment is negative and statistically significant in the post-2000 period, indicating huge capital mobility and currency depreciation. Furthermore, the speed of adjustment is quite low to restore to its steady state point due to structural shift of the parameters.