Study of Foreign Direct Investment and Foreign Exchange Reserve (FOREX) in India

INTRODUCTION

Foreign Direct Investment (FDI) is a type of investment in to an enterprises in a country by another enterprises located in another country by buying a company in the target country or by expanding operations of an existing business in that country. In the era of globalization FDI takes vital part in the development of both developing and developed countries. Many developing countries, reforms their rules, regulation regarding the role of globalization. They change their views regarding FDI also. South Asian countries such as china have implemented open door policies during 1980‘s; but India liberalized its policies during 1991.before liberalization India followed conservative policies to protect the indigenous investors and industrialist. The growth has not been achieved. In 1991, then congress government had implemented liberalization policies to restructure the Indian economy. Foreign exchange reserves are the foreign currencies held by the central bank of country. They are also called foreign currency reserves or foreign reserves. There are many reasons of holding reserves. The most important reason is to manage their currencies' values. Reserves are used to maintain liquidity and to provide confidence. The central bank assures foreign investors that it's ready to take action to protect their investments. It will also prevent a sudden flight to safety and loss of capital for the country. In that way, a strong position in foreign currency reserves can prevent economic crises caused when an event triggers a flight to safety. Reserves are always needed to make sure a country will meet its external obligations. These include international payment obligations, including sovereign and commercial debts. They also include financing of imports and the ability to absorb any unexpected capital movements.

• Growth rate of FDI • Growth rate of FOREX reserve. • Association between FDI and FOREX reserve.

The present study is based on the objectives like how foreign investment is associated with FOREX reserve. To fulfill objective data has been gathered from secondary sources like reports and publication of Govt. and RBI relating to foreign Investment, economic journals, books, magazines and internet etc.

Above Graph are explained detailed in this table. From the above table, it can be conclude that from 2001 to 2004 forex reserve increase with increasing rate. From 2004 to 2006 forex reserve increase with decrease rate .Forex reserve decrease in 2009, 2012 and 2013. Highest growth rate of FOREX reserve in 2008. It can be noted that the FDI inflow into India has increased from US$ 4.03 billion to US$ 60.08 billion the economic reforms in India. A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. International Research Journal of Management and Commerce (IRJMC) ISSN: (2348-9766) have enhanced the FDI inflows into India during the period of research. It can also be inferred from Table 1 that India was able to attract nearly US$ 529.2 billion since April, 2000. It can further be inferred from Table that FDI inflow into India has witnessed steep increase from 2005 onwards after India completed the transitory 10 year period after it became a signatory to WTO agreement effective from 1 January, 1995.

From this, it can be conclude that FDI and FOREX Reserve are highly correlated. Change in one factor either FDI or FOREX affect other factor at very high rate.

The quantum of foreign exchange reserves essentially exhibit a long run or short run correlation with the FDI in case of Indian economy. Although the accumulation of foreign reserves are unprecedentedly high thereby exhibiting a marked departure from the thumb rule ratios suggested by several researchers, it does not have a direct bearing on the FDI as suggested by some authors and there could be many other parameters that contribute to excessive fluctuating in the foreign direct investment. The foreign exchange reserve accumulation in the Indian context could have been largely in anticipation of overcoming financial crisis than a tool for regulating the FDI. It could also be looked upon as a face lift to the Indian economy through enhanced credit ratings which in turn would attract investors to India in the form of foreign direct investment and portfolio investments thereby supplying the much needed capital for stimulating economic growth.

Research Scholar, Department of Commerce, Maharishi Dayanand University, Rohtak