Abstract

Foreign Direct Investment (FDI) is boomed post reform in India. FDI inflows changed not only the domestic
investment but also the trade situation. Then it related to balance of payments tightly. This paper aims to find the
link between FDI and its impact on Indian economy. In this paper, data of some variables affecting current
account balance and capital & financial account balance from 1997 to 2011 is used to generate some results. I
have utilized Granger causality test and impulse response function to analyze effect of FDI to capital and
financial accounts and GDP of India. The empirical results indicate that FDI has a negative effect on current
account and a positive effect on capital account.

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