Are cryptocurrencies a threat to financial stability and economic growth of India? Evidence from the cointegration approach

Abstract

The purpose of this paper is to investigate whether the cryptocurrency market affects the financial stability and economic growth of India. The study used time series quarterly data on bitcoin, financial stability, inflation rate, real GDP, economic volatility uncertainty, exchange rate, and market volatility index for the period 2015Q1–2022Q4. The robustness of the findings was confirmed by the fully modified OLS (FMOLS) and canonical cointegration regression (CCR). The study results demonstrated that an increase in cryptocurrency investments will affect the financial stability of India significantly. Each 1% increase in the cryptocurrency would reduce the financial stability by 5% approximately. However, there was a marginal effect of cryptocurrency on economic growth. The results also found that exchange rate volatility and inflationary pressure would also deteriorate the financial stability of the country. Furthermore, the results also identified positive and significant cointegration between economic growth and financial stability. Due to most transactions in the economy being done through the financial system, it is paramount for economic growth. Going forward, aggressive monetary policy tightening, volatility in capital flows and exchange rates, de-anchoring of inflation expectations, faltering in the economic recovery, disruptions due to global supply chains and climate change will be the major risks to the financial stability and economic growth of India.