Foreign Direct Investment Inflows in the Context of the Trilemma in India

In the post-global financial crisis period, several countries including large emerging economies like India have undergone an increased macroeconomic flux and intensified financial volatility. India has been experiencing choppy foreign direct investment (FDI) inflows during the period. The purpose of this study is to examine how trilemma policy configurations affect the FDI inflows in India. This study uses the “trilemma indexes” developed by Aizenman et al. (2008) which measure the achievement in each of the three policy goals in the trilemma — financial openness, monetary independence, and exchange rate stability for the period 1960-2016. The regression estimates suggest that financial openness index and exchange rate stability index have a significant impact on FDI inflows. Monetary independence index has a positive association with FDI inflows in accordance with the hypothesis. The findings imply that India needs to reform further on the financial openness measure. Exchange rate stability measures are also required to achieve stability on the macroeconomic front. The policy implication could be that there is a need for greater capital account openness required coupled with higher exchange rate stability to achieve higher levels of FDI inflows