Capital Flows, Financial Asset Prices and Real Financial Market Exchange Rate: A Case Study for an Emerging Market, India
In this paper we empirically investigate the relationship between capital flows and exchange rates in India
based on a new index of real effective exchange rates for the Indian Rupiah. Instead of using consumer
price indices we deflate exchange rates by MSCI asset price indices. The cointegration analysis indicates
a long-run equilibrium relationship between our real financial market exchange rate and the net
outstanding equity investment in India. In the short run capital inflows are accompanied by an
appreciation of real financial exchange rate of the Rupiah.