Financial Sector Development and Economic Growth in an Open Economy Framework: India's Experience

The nexus between financial sector development and economic growth in India was examined using quarterly data for the period from 1996QI-2011Q4. Gross domestic product was used as an indicator of economic growth and financial sector development was measured using aggregate deposits, market capitalization, exchange rate, and foreign investments. Gross fixed capital formation was also taken into the model to identify the relative significance of physical investments. With the dynamic relationship among the variables being captured by the vector autoregression model and the impulse response function, the results from the ordinary least square estimation revealed that financial reforms have supported economic growth.