Demand following and supply leading relationships: An empirical analysis for India

Abstract

The study investigates the effects of activities of financial institutions (FIs). In particular, an econometric study has been undertaken to examine the ‘supply-leading’ and ‘demand-following’ characteristics of FI activities. The investigation is conducted by employing time series data using certain macro variables over the period 1962-63 to 1996-97. Our analysis shows the existence of a strong supply-leading (SL) relationship from real disbursements to real investments. The SL relation is further confirmed through the Sims causality tests. The demand-following (DF) relationship from real investments to real disbursements finds weak confirmation via the Sims causality test. Evidence therefore supports the presence of a strong SL link in the Indian context.demand following; supply leading; India