INTERNATIONAL FINANCIAL FLOWS ON INDIAS ECONOMIC GROWTH IN VIEW OF CHANGING FINANCIAL MARKET SCENARIO

Narayan Sethi*
The international capital flow such as direct and portfolio flows has huge contribution to influence the economic behavior of the countries positively. Countries with well developed financial markets gain significantly from Foreign Direct Investment (FDI). The huge volume of capital flows and their influence on the domestic financial markets, understanding the behaviour of the flows becomes very important especially at time liberalizing the capital account. The study attempts to examine the impact of international financial flows on Indias financial markets and economic growth. The study also examines trends and composition of capital inflows, changing pattern of financial markets in view of globalization, ascertain the impact of domestic financial policy variables on international capital flows and suggest policy implication thereof. By using monthly time series data, we found that Foreign Direct Investment (FDI) is positively affecting the economic growth direct contribution, while Foreign Institutional Investment (FII) is negatively affecting the growth alb its, in a small way and make a preliminary attempt to test whether the international capital flows has positive impact on financial markets and economic growth. The empirical analysis using the time series data between April 1995 to December 2004 shows that FDI plays unambiguous role in contributing to economic growth. ********* Key Words: - Capital flows, financial crisis, capital account and global financial markets

___________________________________ * Research Scholar (Ph.D), Dept. of Economics, University of Hyderabad, P.O Central University Email-nsethinarayan@yahoo.co.in

INTERNATIONAL FINANCIAL FLOWS ON INDIAS ECONOMIC GROWTH IN VIEW OF CHANGING FINANCIAL MARKET SCENARIO
Narayan Sethi* INTRODUCTION
International capital flows have significant potential benefits for economies around the world. Countries with sound macroeconomic policies and well-functioning institutions are in the best position to reap the benefits of capital flows and minimize the risks. Countries that permit free capital flows must choose between the stability provided by fixed exchange rates and the flexibility afforded by an independent monetary policy. International capital flows have increased dramatically since the 1980s. During the 1990s gross capital flows between industrial countries rose by 300 per cent, while trade flows increased by 63 percent. Much of the increase in capital flows is due to trade in equity and debt markets, with the result that the international pattern of asset ownership. The integration of debt and equity markets should have been accompanied by a short period of large capital flows as investors re-allocated their portfolios towards foreign debt and equity. After this adjustment period is over, there seems little reason to suspect that international portfolio flows will be either large or volatile. The prolonged increase in the size and volatility of capital flows observed that the adjustment to greater financial integration is taking a very long time, or that integration has little to do with the recent behavior of capital flows Capital flows have particularly become prominent after the advent of globalization that has led to widespread implementation of liberalization programme and financial reforms in various countries across the globe in 1990s. This resulted in the integration of global financial markets. As a result, capital started flowing freely across national border seeking out the highest return. During 1991 to 1996 there was a spectacular rise in net capital flows from industrial countries to developing countries and transition economies. This development was associated with greatly increased interest by international asset holders in the emerging market economies to find trend toward the globalization of financial markets (Singh, 1998; 2002). The global financial markets can gradually create a virtuous circle in which developing and transitional economies 2

strengthen the market discipline that enhances financial system soundness. At present, however, there are important informational uncertainties in global market as well as major gaps and inefficiencies in financial system of many developing countries. Looking at the composition of capital flows, net foreign direct investment represents the largest share of private capital flows in the emerging markets. Net portfolio investment is also an important source of finance in the emerging markets, though these flows were more volatile after 1994 (Rangarajan, 2000). Until 1997 a market shift, in the composition of capital flows to domestic financial market with a significant increase in net private capital inflows to financial markets and a decline in the share of official flows. Foreign Direct Investment (FDI) is the most stable capital. Both net portfolio investment and banking flows were volatile. Portfolio flows are rendering the financial markets more volatile through increased linkage between the domestic and foreign financial markets (Kohli, 2001, 2003). Capital flows expose the potential vulnerability of the economy to sudden withdrawals of foreign investor from the financial market, which will affect liquidity and contribute to financial market volatility. One opinion that could be explored in the face of capital inflow surge is absorption by the external sector through capital outflows. Financial markets are thrown open to Foreign Institutional Investors (FIIs) and there is convertibility of the rupee for FIIs both on current and capital account. Over the years, Indian capital market has experienced a significant structural transformation. Financial markets are significantly different from other markets; market failures are likely to be more pervasive in these markets and there exists Government intervention. Government interventions in the financial markets that promoted savings and the efficient allocation of capital are the central factor to the efficiency of financial markets (Agarwal, 1997; Bernan 1997).

OBJECTIVES OF STUDY
The study broadly examines the impact of international capital flows on economic growth in view of changing Indias financial markets. Specifically, the objectives are: (i) (ii) To examine trends and composition of capital flows To examine the changing pattern of financial market after liberalization 3

(iii) (iv)

To examine the impact of financial flows on economic growth. To suggest policy implication thereof.

MODEL DESIGN
Before going to use OLS technique one should test the stationary properties of the variable in case of time series data. As our data is time series in nature, the study first of all test stationarity of the variables using different unit root tests, namely Dicky- Fuller (DF), Augmented- Dicky Fuller (ADF) and Phillips-Perron (PP) (1988) test. These tests are shown in table-3. To show the Dicky-Fuller (DF) test, the AR (1) process is shown. Yt = + .Yt-1+t Where and are parameters and t is a white noise. Y is stationary, if 1<<1. if = 1, y is non stationary. The test is carried out by estimating an equation with Yt-1 subtracted from both sides of equations. Yt = + Yt-1 + t Where, = 1 and the null and alternative hypothesis are H0 : = 0 H1 : >1 The t-statistics under the null hypothesis of a unit root does not have the conventional t-distribution. Dicky-Fuller (1979) shows that the distribution is nonstandard, and simulated critical values for the selected sample. Later Mackinnon (1991) generalizes the critical values for any sample size by implementing a much larger set of simulations. One advantage of ADF is that it corrects for higher order serial correlation by adding lagged difference term on the right hand side. One of the important assumptions of DF test is that error terms are uncorrelated, homoscedastic as well as identically and independently distributed (iid). Phillips-Perron (1988) has modified the DF test, known as PP test, which can be applied to situations where the above assumptions may not be valid. Another advantage of PP test is that it can also be applied to frequency domain approach, to time series analysis. The derivations of the PP test statistic is quite involved and hence not given here. The PP test has been

shown to follow the same critical values as that of DF test, but has greater power to reject the null hypothesis of unit root test. Symbolically, the model on the impact of FDI, FPI and FII on Indias economic growth can be written as: IIPt = 0 + 1 FDIt + 2 FPIt +3 FII +ut Where, IIP = Index of Industrial Production a monthly index. This has been taken as a proxy variable for Gross Domestic Product (GDP) since the monthly data for GDP are not available. The monthly index of industrial production includes all the three sectors i.e. industry, agriculture and service sector. FDI = Foreign Direct Investment in Rs Crores. The actual data are given in U.S $ Millions. The conversion as fixed of $ into Rs has been made as per the Exchange rates of the respective year. FPI = Foreign Portfolio Investment in Rs Crores. The actual data are given in U.S $ Millions. The conversion as fixed of $ into Rs has been made as per the Exchange rates of the respective year. FII = Foreign Institutional Investment in Rs Crores. The actual data are given in U.S $ Millions. The conversion as fixed of $ into Rs has been made as per the Exchange rates of the respective year. ------------------ (1)

DATA AND PERIOD OF STUDY

The data for the study have been collected from the handbook of statistics in Indian Economy (RBI) and International Financial Statistics (IFS), (IMF). The monthly data have been taken for the period April 1995 to December 2004. Foreign Direct Investment (FDI) is the major part of the direct flows into India, which contribute the direct contribution to growth. Foreign Portfolio Investment (FPI) and Foreign Institutional Investment (FII) are portfolio flows into India since September 1992. However, the data are available only from April 1995.

Trends and Composition of Financial Flows into India

The 1990s saw a radical transformation in the nature of capital flow into India. From a mere absence of any private capital inflows till 1992 (expect those by NonResident Indians), today such inflows represent a dominant proportion of total flows. The official flows shown as external assistance, i.e grants and loans from bilateral and 5

multilateral sources represented 75-80 per cent of flows till 1991. By 1994, this has come down to about 20 per cent and has further fallen to below 5 per cent by late 1990s (Chakrabarti, 2001).

TABLE-1
CAPITAL FLOWS INTO INDIA AFTER 1990S (Yearly) US $ million
Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 LGR FDI 97 129 315 586 1314 2144 2821 3557 2462 2155 4029 6130 5035 4673 16.99482 FPI 6 4 244 3567 3824 2748 3312 1828 -61 3026 2760 2021 979 11377 13.38278 FII 1 1665 1503 2009 1926 979 -390 2135 1847 1505 377 10918 19.60015 NRI 42 89 171 169 135 202 179 171 67 35 NA NA -7.09713 GDR 240 1520 2082 683 1366 645 270 768 831 477 600 459 0.416859

Source: Hand Book of Statistics, Reserve Bank of India (RBI) @ FIIs, NRI, and GDR are introduced in September 1992 and annual data before the 1993 are not available and monthly data are available only from April 1995. Note: - LGR- Linear Growth Rate During the last 10 years, India has attracted more than US $ 40 billion of foreign investment (Table-1). At a time, when the flow of private capital to developing countries has shrunk considerably, private flows to India have strengthened, and are currently running at US $ 9 to 10 billion per year, of which more than 55 per cent constitute FDI and portfolio flows. As a matter of fact, there has been limited recourse to bank borrowing or floating of bonds abroad by Indian corporate sector, as RBI and government tried to limit access to such borrowings to few large private companies with high credit ratings, in a policy of limiting debt creating inflow. In some years though, such debt creating flows were significant and constituted about 40 per cent of inflows. The liberalization of the portfolio investment led to a surge in inflow of capital for investment in the primary and secondary market for Indian equity and corporate (and subsequently sovereign) bond market. About 460 foreign institutional investors (FIIs) have been allowed to enter the Indian market and together have brought in more than US 6

$ 14 billion GDR and ADR floated by Indian corporate sector brought in the remaining portfolio inflows. Table-1 provides an overview of the total foreign capital that India attracted during the 1992-2004 period. As the Table shows, India has attracted about $ 22 billion in portfolio investments since 1993-94 and more than $18 billion in FDI. These portfolio flows began in 1993 when India attracted more than $5 billion in few months and continued at the level of $ 2-3 billion per year till the Asian crises. The year 1998 witnessed a marginal out flow from the Indian stock market but soon the inflows went back to the US $ 2-3 billion per year level.

TABLE-2
INDIA: COMPOSITION OF CAPITAL FLOWS
Variable Total Inflows (net) of which: (In percent) Non Debt creating inflows a) Foreign Direct investment b) Portfolio investment Debt creating inflows a) External assistance b) External commercial Borrowing (ECB) 1993-94 1994-95 1995-96 8895 8502 4089 1996-97 12006 1997-98 9844 1998-99 8435 1999-00 10444 2000-01 10018

(US $ million)
2001-02 10573 2002-03 12113 2003-04 22112

47.6 6.6 41 21.3 21.4 6.8

57.9 15.8 42.1 25 17.9 12.1

117.5 52.4 65.1 57.7 21.6 31.2

51.3 23.7 27.6 61.7 9.2 23.7

54.8 36.2 18.6 52.4 9.2 40.6

28.6 29.4 -0.8 54.4 9.7 51.7

49.7 20.7 29 23.1 8.6 3

67.8 40.2 27.6 59.4 4.3 37.2

77.1 58.0 19.1 9.2 11.4 -14.9

46.6 38.5 8.1 -10.7 -20.0 -19.4

72.5 21.1 51.4 1.4 -12.0 -8.4

c) Short term Credits -8.6 d) NRI Deposits ($) 13.5 e) Rupee DebtService -11.8 Other Capital Total Memo Item: Stable flows 31.1 100 67.6

46 2 -11.6 17.1 100 53.3

1.2 27 -23.3 -75.2 100 33.7

7 27.9 -6.1 -13 100 65.4

-1 11.4 -7.8 -7.2 100 82.4

-8.9 11.4 -9.5 17 100 109.7

3.6 14.7 -6.8 27.2 100 67.4

1.0 23.1 -6.2 -27.2 100 68.2

-8.4 26.0 -4.9 13.7 100 88.1

8.1 24.6 -3.9 64.1 100 84.5

7.1 16.4 -1.7 26.1 100 85.6

Sources Hand Book Statistics of Indian Economy, RBI, 2004

The first phase of stock market liberalization also saw many Indian companies issuing GDR and listing them on European exchanges like Luxembourg. As Table-2 shows the composition of capital flows during 1993-95 more than half of the portfolio investments were the Global Depository Receipts (GDR) floated by the Indian companies while the other half was FII investments. The FII investment was initially limited to a selected group of stocks and they were excluded from the growing market for bonds, and government securities. Their entry into the latter was permitted only in the late 1990s. The total amount of funds raised by India through GDR constituted roughly 40 percent of total inflows. However, during the second half of the 1990s there was a sharp declined in the funds raised through GDR and FII investment in the Indian equity (and recently bond market) became the main form of portfolio inflows (Khanna, 2002).Thus in a span of less than a decade, private foreign investment to India constitute more than 55 per cent of all flows. The total inflow of $ 22 billion as portfolio investment also constitutes a significant proportion of the total market capitalization in India. The Indian economy faced first time a comfortable foreign exchange position. The rising reserves also reduced the vulnerability of the economy to minor shocks and also brought in large amount of investments from Non-Resident Indians (NRIs). The liberalization of gold imports and over all trade liberalization led to a sharp decline in capital flight and the black market premium on foreign exchange disappeared. This led to a diversion of transfer payments (mainly remittances from workers abroad) from illegal to banking channels. The transfer payments rose sharply from $ 2-3 billion in 1991-92 to $ 11-13 billion by the end of the decade 1999-2000.

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GRAPH-I
TRENDS OF INTERNATIONAL CAPITAL FLOWS

International capital flows into india

12000 10000 FDI,FPI,, NRI, GDR AND FII 8000 6000 4000 2000 0 1990-91 1999-00 2002-03 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 2000-01 2001-02 -2000 2003-04 FDI FPI FII NRI GDR

Year The trend of capital flows has been shown in the Graph-I. The trends different segment of capital flows such as FDI, FPI, FII, NRI and GDR are positive except the year 1998-99, where the FPI, FII, NRI and GDR are negative. The FDI is stable and positive after the liberalization. So FDI is only capital inflows into India is stable in nature.

CHANGES OF FINANCIAL MARKETS IN INDIA AFTER LIBERALIZATION, 1991

Financial structure evolves over time with market practices earlier reflecting government policies and five years plan priorities. The stock market in India has been fairly well developed. Its role in financial markets had increased during the 1980s with household savings in corporate securities increasing between 1985 to 1986 and 1994 - 95. But an important feature of the pattern of stock holding had been; the large proportion of share belongs to government owned financial institution e.g. UTI (Gokarn, 1996).

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Government was capable, indirectly influencing the financial markets because of these implications. A distinctive feature of the financial reforms of 1990s had been accent on financial sector reforms. Till the reforms in the early 1990s pricing was not determined by market conditions. Though the volume of transaction was very high, securities continued to exist in the physical form creating uncertainties for the investor, and increasing transaction cost. Long and uncertain settlement cycles created serious problem for clearing houses. International capital flows to the participant were also defiant. Raising of capital from the securities market before 1992 was regulated. Under the capital issues (control) act, 1947, firms were required to obtain the approval from the Controller of Capital Issues (CCI) for raising resource in market. New companies were allowed to issue shares only at par. In 1992, the capital issues (control) act of 1947 was renewed and with this ended all controls relating to raising resource from market. Securities and Exchange Board of India (SEBI) was given statutory powers in 1992 to undertake the tasks of regulations and supervision (Khanna, 1999). The most important fall out of the reform was the free pricing and setting up of new guidelines regarding new issues. Initially, only fixed price mechanism of floating new capital issues were followed. An alternative mechanism of book building1 was introduced in 1995 giving the issuer the choice to raise resources either through this or through the fixed price mechanism. Although the book building guidelines were prescribed in 1995, no issue was floated due to certain restrictive guidelines, which were modified in 1999. The book building mechanism of floating new capital issues has been devised in such a way that those small investors will also be able to subscribe to securities at a price arrived at, through transparent process. Issuers of capital are required to meet the guidelines of SEBI on disclosure and investors protection (Reddy, 1997). In September 1992, Foreign Institutional Investors (FIIs) were allowed unrestricted entry in terms of volume of investment in both primary and secondary markets. In the secondary market, major reforms were the laying down of capital adequacy ratio for brokers; the banning of inside trading and the introduction of computer ________________________________
1

Book building mechanism is a method through which an offer price of an initial public offering (IPO) is based on investors demand.

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based trading system (Pal, 1998 and chitre, 1996). Till recently, trading on the Indian stock exchanges took the place through open outery system baring NSE and OCTEI, which adopted screen based trading system from the beginning (i.e. 1994 and 1992, respectively). At present all other stock exchanges have adopted on-line-screen-based electronic trading. It has replaced the open outery system of the two large stock exchanges; the BSE, which provides a combination of order and quote driven trading system, and NSE, which has only an order driven system. All stock exchanges operating in India have over 8000 terminals spread wide across the country. In 1999-00, the SEBI issued guidelines for opening and maintaining the trading terminals abroad, while no trading terminal could be opened abroad due to high cost of connectivity. For ensuring greater market transparency, the SEBI has recently banned, negotiated and crossed deals (where both the buyer and the seller operate through the same broker) in Sept. 1999. All private off market deals in both shares, as well as listed corporate debts were banned. All such deals were now rotated only through the trading screens. There were three main advantages of electronic trading over floor-based trading as observed in India, viz. transparency, more efficiency price discovery and reduction in transaction costs. It also reduces the segmentation of markets (Bhole, 1999). Thus, emphasis has been on disclosure of information, safeguarding of investors interest and opening up to foreign investors. The result of this has been a dramatic increase in the number of new issues and amount of capital raised after 1991-92. While traditionally; mainly two instruments viz., debt and equity were traded, a large number of new and hybrid instruments were introduced in the first half of nineties through an increase in the new issues (Chakrabrati, 2001 and Samal, 1997). Markets have widened with an increase in the number of players such as mutual funds and Foreign Institutional Investors (FIIs)2. A major implication of this resulted in giving the firms a position to substitute one source of funds for another, depending on relative costs. When the foreign markets were modest this enabled the firms to diversify their source of funds (Mishra, 1997). _____________________
2

There are now 34 mutual funds operating in country with total asset base of over Rs one lakh cr. At the end of the November there were 1351 FIIs registered with the SEBI. They made investment to the extent of about of US $ 11.5 billion in equity. With large investment and acting trading operation, FIIs now significantly impact on Indian financialmarkets.

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TEST OF STATIONARITY
Before going to apply OLS technique the first step is test the stationary of the variables. The results of various unit root tests namely DF, ADF and PP test are shown in table-3 below. All the three tests suggest that not all the variables are having unit root at level. That means they are stationary at level. The DF, ADF and PP test are carried out using without trend and with trend option. In both the cases, results suggest that all the variables are stationary. However, the story is somewhat different in case of IIP variable. The ADF test for IIP suggest that it is stationary at level with trend, where as DF and PP tests indicate it is stationary. However, DF and PP tests suggest that the IIP variable is stationary at level when trend is allowed, where as ADF test does not support it.

TABLE-3
Unit Root Tests Result: Without Trend With Trend

Variable FDI FPI FII IIP

DF -9.278* -5.852* -5.421* 1.234

ADF -9.278*(12) -5.852*(12) -5.421*(12) 2.738***(12)

PP -9.759*(6) -5.852*(0) -5.348* (1) -0.388(6)

DF -9.274* -6.251* -5.919* -6.456*

ADF -9.274*(12) -6.251*(12) -5.919* (12) 1.387(12)

PP -9.759*(6) -6.251*(0) -5.879* (2) -6.685*(3)

Notes: -*: Significant at 1% level, **: significant at 5% level and ***: significant at 10% level. The critical values for unit root tests are 3.48%, 2.88% and 2.58% without trend and 4.03%, 3.44% and 3.14% with trend at 1%, 5% and 10% level respectively. The numbers in parentheses represent optimal lags, which are selected automatically by EViews using Schwarz info Criterion for ADF test and newly west method for PP test. Hence, it can be concluded that IIP is stationary at level as two tests namely; DF and PP indicate that it is stationary when trend is allowed. As the tests of stationarity

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show that all the variables are stationary at level, the study uses these variables without taking any difference for regression analysis.

EMPIRICAL RESULTS
This section of the study presents the empirical results of the impact of international capital flows on Indias economic growth after post liberalization era. The result is based on OLS regression analysis. The study regress IIP on FDI, FPI and FII to find out the impact of capital flows on economic growth of after liberalization. The models are using OLS technique, but the result can be considered as the Durbin-Watson (DW) statistic is very low with the (presence of auto-correlations), which violates OLS assumptions. To solve the problem of auto-correlation of error term, we have allowed an AR (1) term of residuals. This result is shown in table 4 in model-2.

TABLE- 4
Impact of Capital Flows on Growth
Variables
C FDI FPI FII AR (1) (AR (2)

Model-1
184.2699 (4.7761)* 0.009901(2.2380)* 0.016291 (4.1530)* -0.014096 (3.2681)*
-

Model-2
244.9976(1.2645)* 0.010115 (2.1250)* 0.013070 (3.0979)* -0.009313(-2.0570)* 0.972040(34.9807)* -

Model -3
244.9976(1.2645)* 0.010115(2.1250)* 0.013070(3.0979)* - 0.009313(2.0570)* 0.533676 (5.88)* 0.453423(5.0096)*

R2 = 0.919, Adjusted R- Squared = 0.916 for Model 2 and R2 = 0.932, Adjusted R- Squared = 0.928 for Model-3. DW-Statistic= 2.714, AIC = 6.782 for Model 2 and DW-Statistic = 2.027, Akaike Info Criterion (AIC) = 6.610 for Model-3.

Notes: - Figure in brackets of table relate to t-value : * Indicates the t values are significant at 1 percent level 15

The results show that DW statistics as 2.71 which means still there is the presence of auto-correlations in the error terms. To get better result, we have estimated the model allowing AR (1) and AR (2) terms of the residuals. The results are presented in the following table-4 in model-3. The DW statistics is 2.02 in Model-3, which means there is absence of auto-correlation in the error term. The R2 of this model is comparatively higher (0.93) in model-3 then the Model-2 (R2 = 0.91). And also Akaike Info Criterion (AIC) which is used for the selections of better model suggest this model 3 as (table-4) better than the Model-2 (table-4.), as AIC 6.610 for the model-3 where as AIC = 6.782 for the model-2. Therefore, we consider the model-3 reported in table-4 for our analysis. The coefficient of the variables shows the effect on economic growth. In table-4 the coefficient of FDI (1), FPI (2) and FII (3) are statistically significant. The t-values reported in the table to test the significance of 1, 2 and 3 respectively are greater than 2. That means the coefficients are significantly different from zero (0). Therefore, all the independent variables (FDI, FPI and FII) have significant effect on economic growth. FDI and FPI are affecting IIP positively as the coefficients are 0.010 and 0.013 respectively. This supports our theory that capital flows are affects economic growth positively. In the case of FII the coefficient is negative that is -0.0093 that means FII affects IIP negatively and the effect is very negligible. The empirical analysis showed that FII negatively affect the economic growth, where as FDI and FPI positively affect the economic growth in India. FII are more volatile in nature into Indian capital market. After some years and month FII is negative in India, due to the more volatility in Indian capital market. Volatility of FII flows probably has negative effects on economic growth. Somewhat surprising, the coefficient for the level of total capital flows is significant with negative sign of FII on economic growth in India (Lensik, et. al 2003)

POLICY AND CONCLUSION

Portfolio capital flows are invariably short term and speculative and are often not related to economic fundamentals but rather to whims and fads prevalent in international 16

financial markets. There are three-policy implications, which emerge from this analysis. First India should move to influence both the size and composition of capital flows. Second India should focus on strengthening theyre banking system rather than promoting financial markets. Banks can provide the surest vehicle for promoting longterm growth and industrialization. Thirdly since financial markets in India are here to stay, Government should try to shield the real economy from their vagaries. The trends of total international capital flows into India are positive, where portfolio investment flows are negative in the year of 1998-99. The Foreign Direct Investment (FDI) does not reveal stable trend so far in India. The composition of capital inflows in India makes a significant size both in terms of impact and smooth management. The impact of total capital flows on economic growth is positive in India. The Foreign Direct Investment (FDI) that has huge contribution to influence the economic behaviour is also positively affecting the economic growth. The Foreign Portfolio Investment (FPI) is indirectly affecting the economic growth, which has less impact on economy. The Foreign Institutional Investment (FII) has negative impact on growth, but it is very negligible.

Note: - Financial flows and capital flows are simultaneously used in the paper as the same meaning

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