Are cryptocurrencies really a threat to the financial stability and
economic growth? Evidence from the cointegration approach
SHRIKANT KRUPASINDHU PANIGRAHI
Economics and Finance Department
University of Bahrain
College of Business Administration, Sakhir Campus
BAHRAIN
Abstract: - The main purpose of this paper is to investigate whether the cryptocurrency market affects financial
stability and economic growth of India. The study used quarterly data on bitcoin, financial stability, inflation
rate, real GDP, economic volatility uncertainty, exchange rate, and market volatility index for the period
2015Q1-2021Q4. 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.
Key-Words: - cryptocurrencies, financial stability, bitcoin, GDP growth, cointegration, India
Received: May 15, 2022. Revised: May 17, 2023. Accepted: June 19, 2023. Published: July 17, 2023.
1 Introduction
The uniform functioning of the economy ensures
fund security and appropriate allocation of
resources. Hence if there is imparity in the financial
system functionalities, the fund flow will be reduced
leading to the aggregated economy. In the past few
years, the world economy has experienced several
major challenges leading to economic uncertainty.
One such challenge for an emerging country like
India is to regulate the use of cryptocurrencies. As
per the sociotechnical systems theory, crypto
development is dismembered to crypto operating
services, governance, practices, operating platforms
and practices. Cryptocurrencies have emerged as a
pseudo-asset class in the past few years and have
become attractive for market participants despite
their high volatility rates [1]. However, it is still
debatable whether cryptocurrencies qualify as an
actual asset class in the financial market. There has
been a growing debate in the world market about
legalizing digital currencies and being endowed
with a booming cryptocurrency industry. Many
countries like China, Egypt, Qatar, Tunisia,
Bangladesh, Algeria, Nepal, Morocco, and Iraq have
completely ban on the digital currencies and
services surrounding cryptocurrencies. According to
the report by the Law Library of Congress, 42 other
countries and their jurisdictions have prohibited
cryptocurrency exchanges. However, a country like
India is taking cognizance of regulating and
rationalizing cryptocurrency trade. Governments
that have banned cryptocurrencies have revealed
that the rise of crypto could destabilize their
financial systems and they also possess money
laundering from illegal sources. Recently, Reserve
bank of India Governor Shaktikanta Das warned
that banks have serious concerns over
cryptocurrencies as these are a big threat to the
country’s financial and macroeconomic stability due
to no underlying asset [2]. He further reiterated that
cryptocurrencies are posing similar risks to cyber
security and warned investors to be cautious and
invest at their risks. China fully banned
cryptocurrencies in January 2022 due to its special
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
66
Volume 2, 2023
concern about using digital currencies for fraud and
money laundering. Indian government’s stance on
digital assets has considerably changed from an
outright ban on cryptocurrencies in 2016. Currently,
there is no complete ban on the use of
cryptocurrencies in India, however, the Reserve
Bank of India (RBI) has ordered banks to avoid
supporting crypto transactions. Recently, a high-
level Inter-Ministerial Committee (IMC) suggested
that all private cryptocurrencies, except any virtual
currencies issued by a state, will be prohibited in
India [3]. In the wake of recent economic
uncertainties due to the COVID-19 pandemic and
the recent conflict of war-like situation between
Ukraine and Russia, there is an urgent need and
growing concern about economic policies and
financial decisions to avoid any financial and
macroeconomic instability.
There have been growing studies that focus on the
concerns over cryptocurrencies questioning the
economic growth paradigm [4]; exploring the
relationship between cryptocurrencies and financial
assets [5, 6]; cryptocurrencies and global challenges
[7]; cryptocurrencies and stock market indices [6].
However, it must be noted that there is lack of
researches focused on the threat that
cryptocurrencies pose to the financial stability and
economic growth of the country. A financially
unstable country will be poised by internal and
external shocks. Intuitively, any factor that disrupts
the financial system would make the system
complex and would affect productive investment,
uniform lending, better investment opportunities and
economic activity. Theoretically, the economy or
financial system is destabilized due to recession,
uncertain government policies (policy paralysis), or
collapse of financial or non-financial institutions
[8]. Policymakers, whose job it is to ensure the
stability of the financial markets, as well as
investors with cryptocurrency holdings in their
investment portfolios, need to understand the risk
associated with cryptocurrency investments.
Cryptocurrencies available in the form of
cryptographic codes, and confirmed through a
computer-based mining process, are a 21st century’s
newly digitized money well known as Blockchain
Technology [9]. Cryptocurrencies are also known as
crypto coins, virtual currency, or digital currency
that operates in a decentralized medium of financial
exchange backed by user consensus primarily. The
imagination of customers, investors or capitalists,
and entrepreneurs are caught by these virtual
currencies (Fig.1).
Fig.1 Various cryptocurrencies and their symbol
Bitcoin as a digital currency was first proposed
by Nakamoto (2008) for using it as an open-source
system. As per the data shown by CoinMarketCap
(see: http://www.coinmarketcap.com) the combined
market capitalization of cryptocurrencies has
received to $ 1.85 trillion as of February 18, 2022,
with bitcoin at $ 771 worth, followed by Ethereum
with $345 billion worth, Tether at $78.7 billion,
BNB coin with the worth of $66.7 billion, USD
Coin at $52.5 billion. Crypto assets and stable
coins, which typically have no underlying securities
and are largely utilized for riskier investments, are
examples of new digital assets created as a result of
technological advancements fueled by encryption
and distributed ledger technology (DLT). From
early 2020 to late 2021, when it peaked at
approximately USD 3.0 trillion, the market value for
crypto assets exponentially increased. It then
experienced a dramatic decrease to less than US $ 1
trillion in June 2022.
The issue of financial stability has been the
main focus of both academicians and
policymakers. After the 2008-2009 financial
crisis, new regulations were proposed to frame
and supervise the financial system [10]. Due to
the unique nature of financial stability as a
public good, new regulations have been
proposed to frame and supervise the financial
system. As shown in figure 2, the bitcoin price
had increased from 10000 USD to 55000 USD
since 2020, whereas the financial stability of
India declined drastically since 2020 together
with increased economic volatility. GDP
growth was the most affected since 2019 which
declined to -8%.
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
67
Volume 2, 2023
Fig.2: Comparing bitcoin graph with
macroeconomic and financial stability factors
Source: Constructed by author using EVIEWS
Fig.3: Bitcoin volume in India (2013-2020)
Source: www.coindesk.com
Figure 3 shows the volume of bitcoin trade in
India since 2013. Due to the Indian banknote
demonetization in 2016, the volume of bitcoin
trading started increasing and it reached a peak of
250 million volume transactions in 2018 before RBI
banned the crypto exchanges. In 2020, after the
supreme court lifted the ban, the volume of bitcoin
trading touched 300 million in 2020. This increase
in the volume of bitcoin indicates that either
investor are getting attracted to the crypto world or
they are using crypto investment as a source to
convert their black money to white. Chakravaram,
Ratnakaram [9] while investigating the threats of
cryptocurrencies found that most people who are
investing in cryptocurrencies wish to convert their
black money, and illegal earnings to white. Few
cryptocurrency enthusiasts claim that digital money
will democratize finance by redistributing power
from the government to the people. Annie [11] in an
interview with key economist Eswar Prasad. He
further stated that if cryptocurrencies are not
regulated under the financial system to improve
investors’ protection, it might contribute to financial
and monetary instability.
There has been significant and different opinion
on the role of cryptocurrency and its impact on
financial innovation and economy. Table 1 provides
the systematic literature review of previous
researchers on the aspect of cryptocurrency-
economy crux.
Table 1. Previous literature on cryptocurrency and
economy relationship
Authors
Findings
Economic crux
[12]
The welfare costs
should be pinned
down with an
insight through
double spending
constraints and
using costly mining
of cryptocurrencies.
Bitcoin creates
huge welfare loss to
the economy which
is about 500 times
that of the monetary
economy with 2%
inflation.
[13]
Cryptocurrency
negatively affect
economic growth
Cryptocurrencies
are a good growth
tool for poor
nations, but only if
their future use
leads to an
improvement in the
level of financial
knowledge required
to access the online
resources.
[14]
Cryptocurrency
trading sparked
economic growth,
which attracted
more funding for
advancing smart
and
environmentally
friendly technology
to reduce carbon
emissions from
economic growth.
Increasing
cryptocurrency
trading will
improve economic
growth and
globalization.
However, in the
long run the
relationship
between
cryptocurrency and
GDP is not
confirmed.
[15]
the correlation of
the Stock Market,
Financial
Innovation and
Cryptocurrency to
Indonesia's
Cryptocurrency will
be give more
impact to economic
growth if it is
treated as legal
money in trading.
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
68
Volume 2, 2023
economic growth,
in the long run, all
the variables give a
positive correlation.
[16]
Cryptocurrency has
given highest
returns compared to
other investment
instruments.
Government should
regulate and adopt
cryptocurrency to
secure investors and
economic growth.
[17]
study of
cryptocurrency
volatility is
important in terms
of financial
instruments for
hedging traditional
assets, as well as in
terms of pricing
economic factors
such as inflation
and the Fed rate
have a long-term
negative effect on
the price of Bitcoin.
Despite the fact that cryptocurrencies are being
used more frequently to purchase products and
services as well as financial assets, the economic
driving force behind this phenomenon is still up for
debate. Majority of previous literature on
cryptocurrency and economic performance has
focused on the development of prices and regulatory
issues. Theoretically, an increase in uncertainty
leads to information asymmetry making opaque
characteristics of borrowers [18]. It is quite difficult
for lenders to differentiate between good and bad
borrowers, leading to investment decline and
correction in economic activity consequently.
Different aspects of cryptocurrencies as a digital
assets have been investigated in finance, including
risk-return characteristics [19], returns volatility
[20] and transaction activity [21].
Most of the existing studies have focused on the
volatility spillovers of the stock market and
cryptocurrencies [22], cryptocurrencies as a
backstop for the stock market [23], cryptocurrencies
as a safe haven for the stock market [24]. Despite
the wide literature on cryptocurrencies and their
empirical relationship with the stock market, few
empirical studies have dealt with the financial
instability threats that cryptocurrencies possess on
the economy. This study contributes to the literature
by adding a strand of literature that examines the
role of cryptocurrencies on various economic and
financial stability issues. This study hereby, argues
that more distortion by cryptocurrencies would
deteriorate the financial and economic conditions. A
high regulatory framework would reduce the
uncertainty and exposure to financial distorted
instruments and be less affected by the vulnerability.
The hypothesis is motivated by the rising concern
about cryptocurrencies that could be a threat to the
economy and financial stability. That is, it becomes
difficult to manage the financial system and
economic growth if disrupted by the so called crypto
digital currencies. Furthermore, the effect of
cryptocurrencies on economic and financial stability
depends on the financial system and regulatory
framework.
The remaining sections apart from the
introduction are the “methodology” section that
deals with the data source and types, econometric
estimation and definition of the variables in detail.
The empirical estimation of the model and its
interpretation is provided after the methodology
section. Finally, the conclusions and policy
implications are described in the last section.
2 Methodology
2.1 Data Source and Type
Secondary data was collected from the World bank
database, also known as World Development
Indicator (WDI) database, the policy uncertainty
index, investing.com and from yahoo finance.
Annual data for GDP growth rate, inflation rate,
exchange rate, financial stability, and lending rate,
collected from the WDI database were converted to
quarterly data. Whereas, Bitcoin price, India
volatility index and economic policy uncertainty
were converted from monthly to quarterly data. The
new dataset converted to quarterly produced longer
time series, improve consistency, and improvised
control as suggested by [25]. Quarterly time series
data from 2015 to 2021 of all the constructs, with a
total of 28 observations were employed. Data
originated in 2015 because bitcoin as a
cryptocurrency was first introduced in October
2014. Other cryptocurrencies were excluded from
the study investigation due to their lack of data
availability and a maximum of them were launched
in the recent five years since 2017. It also used
quarterly data for lending rates as it precisely
reflects the effect of monetary and macroeconomic
policy from the central bank.
Numerous scholarly investigations have looked
into the variables affecting economic growth and
financial stability. To estimate the long-run co-
integration between CO2 emissions and economic
growth, Khan, Panigrahi [26] performed the
FMOLS analysis. Similarly, Pradhan [27] used
FMOLS and VECM estimation to investigate the
cointegration between remittance and economic
growth. This study used FMOLS for the co-
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
69
Volume 2, 2023
integration between the variables and CCR for the
robustness of the model.
2.2 Model Description
Following Mbilla, Atindaana [28], this section
specifies an appropriate model for the analysis
determining the link between financial stability,
macroeconomic stability and cryptocurrency.
Financial stability and GDP growth rate were
represented as the dependent factors whereas,
bitcoin was the independent factor and the exchange
rate, inflation rate, lending rate, risk-free rate, India
volatility index, and economic policy uncertainty
were used as control variables for the model.
The regression relationship of the model is stated as:
(1)
(2)
Where z_scores in eq (1) is the proxy for the
financial stability used as a dependent variable, BTC
represents the cryptocurrencies, i indexes the
country, t represents the quarterly time. Other
macroeconomic and market-related variables were
also employed in the modelling framework.
Similarly, GDP in eq (3) is the proxy for the
economic growth used as a dependent variable,
2.3 Variable Description
Bitcoin was first introduced by a code
developer named Satoshi Nakamoto, and it was
then conceived as a decentralized digital
currency validated by cryptography [29]. Since
then, bitcoin has been attractive to traders as a
means of exchange. Bitcoin was represented as
the main cryptocurrency and is described in US
Dollar. Bitcoin is a digital asset that operates
free of any central control and relies on peer-to-
peer software and cryptography [30]. A bitcoin
transaction is kept private with the help of
cryptography and is electronically signed [31].
In early October bitcoin started trading
officially on the online platform and reached the
price of $123 by December 2014. Thus, this
study included the data for bitcoin from 2015Q1
till 2021Q4. Table 2 describes the variables
used in this study and the sources of these
variables. Amongst the different
cryptocurrencies, only Bitcoin was chosen due
to its popularity and maximum market
capitalization in the global as well as the Indian
cryptocurrency market. Data for Bitcoin was
obtained from the official website
www.coinmarketcap.com.
Table.2. Variable descriptions
Variables
Descriptions
Source
Financial
stability (z-
scores)
Country level
z-score
World Bank Global
Financial Development
Database
GDP
Growth
Percentage
changes in
GDP
World Bank
Development Indicators
(WDI)
Cryptocurre
ncy
Bitcoin prices
(closing
basis)
www.coinmarketcap.com
Inflation
rate
Consumer
price index
(CPI) changes
World Bank
Development Indicators
(WDI)
Lending
rate
Interest rate
of lending
World Bank
Development Indicators
(WDI)
Exchange
rate
The currency
exchange rate
between
USD/Indian
Rupee
World Bank
Development Indicators
(WDI)
Risk free
rate
Government
bond maturity
www.investing.com
Market
volatility
index
(VIX)
Volatility
index to
measure
market’s
anticipation
for volatility
and
fluctuations
www.yahoofinance.com
Economic
policy
uncertainty
Possibility of
government
policies and
regulatory
frameworks
becoming
ambiguous
www.policyuncertainty.c
om
Financial stability for India was calculated using
the z-score value retrieved from the WDI database.
Z-score is the common measure of stability at the
level of individual institutions or countries. It
compares returns or capitalization with the risk to
measure a bank’s solvency risk. The probability of
insolvency is low when the z-score level is high.
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
70
Volume 2, 2023
Many previous studies [32-34] have used the z-
score as a proxy to measure financial stability.
Financial instability may lead to hyperinflation,
bank runs, and stock market crash. GDP growth was
measured as a percentage change in GDP. The
yearly data for GDP was extracted from World
Bank Database and was converted to quarterly data.
The inflation rate was calculated as a change in
the consumer price index. The data for the inflation
rate was extracted from World Bank Development
Indicators. The lending rate was calculated as the
interest rate of lending by the banks. The exchange
rate was calculated as the currency exchange rate
between the United States Dollar (USD) and Indian
Rupee (INR). The data for the inflation rate,
exchange rate, and the lending rate was extracted
from World Bank Development Indicators. The
risk-free rate was calculated by government bond
maturity. The data for the risk-free rate was
extracted from the investing.com website. Indian
market volatility index (VIX) was used to measure
the market anticipation for volatility and
fluctuations. VIX was extracted from the yahoo
finance website. Economic volatility index
uncertainty (EVIU) is the possibility of government
policies and regulatory frameworks becoming
ambiguous shortly. The data for EVIU was taken
from the policy uncertainty website. The EVIU
takes into account volatility, which may cause
enterprises to postpone spending and investments.
3 Results and Discussion
Empirical analysis using time series secondary data
was performed for the quarterly data from 2015 to
2021. Table 3 presents the basic characteristics of
the variables in the study showing the mean,
median, maximum, minimum, standard deviation,
skewness, kurtosis, Jarque-bera and probability
statistics. The Jarque-bera supported the normal
pattern of the variable and represented the peak by
kurtosis [35, 36].
Table 3. Descriptive statistics
Desc
ripti
ve
1
2
3
4
5
6
7
8
9
Mea
n
123
02.
46
69
.1
30
21.
75
0
5.
14
6
4.
7
8
2
9.
37
2
5.
34
6
15
.5
35
73.
17
5
Medi
an
592
0.1
9
68
.7
35
21.
86
75
6.
69
7
4.
9
1
5
9.
46
3
5.
44
8
15
.2
86
71.
72
7
Maxi
548
76.
75
.7
23.
82
9.
2
6.
6
10
.0
6.
26
24
.8
13
4.5
mum
94
6
2
1
7
73
Mini
mum
238
.65
62
.0
92
19.
27
-
7.
25
2
3.
3
3
8.
8
4.
34
10
.3
7
39.
88
2
Std.
Dev.
171
50.
04
3.
99
9
1.3
81
8
4.
44
5
0.
9
9
0
0.
34
8
0.
64
4
3.
60
4
18.
98
5
Ske
wnes
s
1.4
764
0.
05
0
-
0.1
07
-
1.
43
2
0.
2
3
5
-
0.
28
1
-
0.
22
5
0.
80
4
1.0
86
Kurt
osis
3.5
79
1.
75
3
1.9
30
4.
03
0
1.
7
7
9
2.
25
8
1.
79
1
3.
25
2
5.1
41
Jarqu
e-
Bera
10.
562
1.
82
7
1.3
90
10
.8
07
1.
9
9
7
1.
01
0
1.
94
1
3.
08
8
10.
85
6
Prob
abilit
y
0.0
05
0.
40
1
0.4
99
0.
00
5
0.
3
6
8
0.
60
3
0.
37
9
0.
21
4
0.0
04
Note: 1) Bitcoin; 2) Exchange rate; 3) Financial Stability
using z-score; 4) GDP Growth; 5) Inflation rate; 6)
Lending rate; 7) Risk free rate; 8) India volatility index;
9) Economic policy Uncertainty
The mean value of bitcoin was found to be
$12302.46 which is quite lower as compared to the
current price of $16700 as of 20 December 2022.
Exchange rate mean value was found to be 69.13
INR/USD, followed by the GDP growth mean value
of 5.146%. Inflation rate mean value was 4.78%
which is quite lower as compared to the current
inflation rate of 7%. This increase in inflation rate
was due to recent hike in the interest rate by the
central bank in order to curb inflation.
In order to test the associations between the
dependent, explanatory and control variables, it is
important to confirm the stationarity through the
integration of order one. To confirm the stationarity,
unit root tests by applying Augmented Dickey
Fuller (ADF) and Phillip-Perron (PP) were
inspected. The empirical results as shown in Table 4
shows that there is no stationarity in all the variables
at the level, thus accepting the ADF and PP
hypothesis. However, at the first difference, the
ADF and PP hypotheses were rejected confirming
there is stationarity for all the variables.
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
71
Volume 2, 2023
Table.4. Unit root test results.
Constructs
ADF
PP
Level of
stationarity
BTC
1.81
-0.03
-
Δ BTC
-2.99*
-4.57*
I(1)
GDP
-2.74
-1.65
-
Δ GDP
-2.47*
-2.35*
I(1)
EXCH
-0.93
-1.11
-
Δ EXCH
-3.37*
-3.35*
I(1)
EVIU
-3.56*
-3.59*
-
Δ EVIU
-6.50*
-10.5*
I(1)
INF
-1.94
-1.23
-
Δ INF
-2.26*
-2.34*
I(1)
VIX
-3.06*
-1.59
-
Δ VIX
-2.49*
-2.49*
I(1)
LR
-0.91
-0.85
-
Δ LR
-1.78*
-1.84*
I(1)
RFR
-1.95
-1.04
-
Δ RFR
-2.16*
-2.27*
I(1)
Note: ADF-Augmented Dickey-Fuller test, PP-Phillips-
Perron test;. * means significant at 5% level. Source:
Calculated by the author using eviews-12 software.
In the next step, we examined the correlation
between the variables as available in Table 5. The
results indicated that there is a negative association
between bitcoin price and financial stability.
Meanwhile, exchange rate, GDP growth and the
Indian volatility index were found to have a positive
association with bitcoin price. Furthermore, the
exchange rate is negatively correlated to financial
stability and GDP growth. In addition, GDP growth
was also having a negative relationship with the
inflation rate.
Table.5: Correlation matrix for the variables
1
2
3
4
5
6
7
8
9
Bitcoin
price
1
0.
67
6
-
0.
25
4
0.
21
5
0.
50
9
-
0.
85
6
-
0.
77
3
0.
20
0
-
0.
05
8
Exchange
rate
1
-
0.
30
7
-
0.
38
0
0.
66
1
-
0.
87
2
-
0.
69
2
0.
59
1
0.
28
1
Financial
Stability
1
0.
31
9
-
0.
81
4
0.
23
4
0.
31
9
-
0.
79
9
-
0.
55
4
GDP
Growth
1
-
0.
42
1
0.
20
8
0.
09
2
-
0.
68
1
-
0.
48
2
Inflation
rate
1
-
0.
57
1
-
0.
44
0
0.
88
3
0.
47
2
Lending
rate
1
0.
90
0
-
0.
41
9
-
0.
13
5
Risk free
rate
1
-
0.
36
2
-
0.
20
2
Volatility
Index
1
0.
61
5
Economic
Uncertain
ty
1
Note: 1) Bitcoin; 2) Exchange rate; 3) Financial Stability
using z-score; 4) GDP Growth; 5) Inflation rate; 6)
Lending rate; 7) Risk free rate; 8) India volatility index;
9) Economic volatility index Uncertainty
Source: Calculated by the author using eviews-12
software.
Co-integration test was performed to check the
long-term association between the variables. Long
term effect of bitcoin on financial stability and
economic growth and other macroeconomic factors
discussed in this study are expressed quantitatively,
and it can be said that there is a strong interaction
with each other. Results of FMOLS and CCR model
estimation with financial stability as a dependent
variable are presented in Table 6. The result finds
that there is negative and significant cointegration
between financial stability and bitcoin (β = -5.73,
p<0.001) indicating that in the long run
cryptocurrencies may contribute to the monetary
and financial instability of the country if they were
to spawn a large and unregulated financial system
and retail investor’s protection. The interaction
between financial stability and economic growth
estimated that a 1% increase in economic growth
would result in an increase of 0.15% in the financial
stability of the country. When the effect of the
exchange rate is considered, it can be estimated that
a 1% increase in the exchange rate would yield to
decrease of 0.10% in financial stability. The results
obtained provided are similar to previous studies
[37, 38] which mentioned that exchange rate
volatility may decline the financial stability or stress
of the country. The cointegration between economic
volatility uncertainty and financial stability was not
significant indicating that in the long run economic
uncertainty is unable to destabilize the Indian
financial system. Indian financial system display
resilience because they came into the epidemic with
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
72
Volume 2, 2023
relatively solid balance sheets that were bolstered by
greater liquidity buffers and stronger capital. Losses
have been manageable, and unlike during the global
financial crisis (GFC), when banks deleveraged and
reduced lending, global bank lending has remained
strong. It is reassuring to note the stability of these
institutions' fundamental solvency and liquidity
positions. Furthermore, inflation was found to have
strong negative cointegration on financial stability
estimating 1% increase in the inflation rate would
yield to decrease the financial stability by 1.65%.
Reflecting the uncertainty due to the COVID-19
pandemic and war, rising interest rates in response
to hardening inflationary pressures will further
tighten the financing conditions.
Table.6. Long-run model estimation with financial
stability as a dependent variable
FMOLS
estimation
CCR
Variab
les
Coeffici
ents
t-
statistic
s
Coeffici
ents
t-
statistic
s
BTC
-5.73***
-5.900
-
5.75***
-4.39
EXCH
-0.10***
-3.55
-0.11***
-3.23
EVIU
0.001
0.440
0.001
0.200
INF
-1.65***
-9.52
-
1.667**
*
-6.67
VIX
0.129**
2.45
0.134**
1.98
LR
-
10.06**
*
-11.88
-
10.18**
*
-12.56
RFR
3.06***
12.57
3.10***
11.68
C
112.47*
**
13.69
114.27*
**
14.00
R2
0.959**
*
0.961**
*
Note: p<0.001 - ***, p<0.05**. BTC – Bitcoin, GDP –
gross domestic product, EXCH – exchange rate, EVIU –
economic volatility index uncertainty, INF- inflation,
VIX -Indian volatility index, LR – lending rate, RFR –
risk-free rate, R2 – Regression square. Source: Calculated
by the author using eviews-12 software.
Table 7 presents the cointegration test for the
variables with GDP growth as a dependent variable.
The study findings divulge that cryptocurrencies are
subjected to have a marginal effect on economic
growth in the long run. However, financial stability
was having strong cointegration with economic
growth. The interaction between financial stability
and economic growth is estimated that a 1%
increase in financial stability would yield to increase
of 3.45% in economic growth. Despite a hostile
foreign climate, the Indian economy and local
financial system continue to be strong and resilient
thanks to solid domestic macroeconomic
fundamentals. The Indian financial system is well-
positioned to help the economy grow due to strong
capital buffers and rising asset quality levels. The
interaction between the exchange rate and economic
growth estimated that a 1% increase in the exchange
rate would result in an increase of 0.57% in
economic growth. Due to geopolitical conflicts due
to increased global uncertainty, the surge in crude
oil prices and tightening monetary policy led the
USD-INR exchange rate to touch an all-time low of
81.92 on October 6, 2022.
Table.7. Long-run model estimation with GDP as a
dependent variable
FMOLS
estimation
CCR
Variab
les
Coeffici
ents
t-
statistic
s
Coeffici
ents
t-
statistic
s
BTC
0.003**
*
8.310
0.003**
*
5.72
Fin_st
ab
3.45***
5.270
3.48***
6.23
EXCH
0.579**
*
4.179
0.62***
3.61
EVIU
-0.02
-1.470
-0.019
-0.70
INF
6.80***
6.060
6.96***
5.22
VIX
-0.99***
-4.597
-1.048**
-3.13
LR
46.21**
*
10.47
47.63**
*
9.28
RFR
-
13.36**
*
-8.011
-
13.67**
*
-7.78
C
-
490.9**
*
-8.990
-
505.73*
**
-8.29
R2
0.903**
*
0.907**
*
Note: p<0.001 - ***, p<0.05**, p<0.10*, BTC – Bitcoin,
FIN_STAB-financial stability, EXCH – exchange rate,
EVIU – economic volatility index, INF- inflation, VIX -
Indian volatility index, LR – lending rate, RFR – risk free
rate, R2 – Regression square
Similarly, other macroeconomic factors like
inflation rate, lending rate, volatility index and risk-
free rate were having strong cointegration with
economic growth. Due to an increase in global
financial stability risks, the macroeconomic and
financial developments of India have posted a
modest improvement. However, due to
overwhelming geopolitical tension, maintaining
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
73
Volume 2, 2023
macroeconomic and financial stability would be a
great challenge for central banks over the world.
4 Conclusion
This study explored the relationship between
cryptocurrency, financial stability and economic
growth in India from 2015 to 2021. We utilized
eight different determinants including bitcoin,
exchange rate, economic volatility uncertainty,
inflation rate, volatility index, lending rate, and risk-
free rate to analyze its impact on financial stability
and economic growth. FMOLS regression analysis
was performed to explore the relationship whereas;
canonical cointegrating regression (CCR) was
estimated for the robustness of the model.
The results show that all the determinants have
cointegration with financial stability and economic
growth, except economic volatility uncertainty.
Bitcoin representing cryptocurrency was found to
have a negative relationship with financial stability.
This result indicated that a 1% increase in
cryptocurrency will decrease the financial stability
of the country by 5%. Although there haven't been
any big defaults by financial institutions as a result
of the recent considerable volatility of crypto-assets,
the risks of these events are growing. Increased
financial institution involvement could accelerate
the growth of crypto-assets and raise the risks to
financial stability. The rising options provided by
cryptocurrency exchanges for investors to enhance
their exposure through leverage could heighten the
threats to financial stability. According to estimates,
leverage on crypto assets has significantly increased
in recent years.
The coefficient of GDP is positively significant
with financial stability at a 1% significant level.
Where a 1% increase in GDP growth increases
financial stability by 0.15%. Greater financial
stability could result from faster economic growth.
On the other side, increased inflation or unstable
prices could hurt financial stability. Financial
stability can aid monetary policy by enhancing
growth and inflation's reaction to changes in interest
rates. Regulators should make sure the system runs
smoothly and support regional growth. A
prerequisite for sustainable economic development
is consequently the soundness of financial
institutions. The empirical findings show a
correlation between India's economic development
and a better level of financial system stability.
Therefore, strong economic performance is
encouraged and is favourably predicted by financial
stability.
The coefficient of the exchange rate was
negatively related to financial stability at a 1%
significant level. Where a 1% currency depreciation
increase would decrease the financial stability by
0.10%. Our findings imply that the exchange rate
significantly influences the net worth and credit
availability of Indian non-financial enterprises. With
tighter US monetary policy and a greater
depreciation of the rupee against the dollar, credit
conditions for businesses often deteriorate. While it
may be beneficial to counter US monetary
tightening with higher domestic interest rates to
slow rapid currency depreciation, doing so is likely
to result in more output volatility.
The results of the inflation rate indicated that a
1% increase in the inflation rate, decreases financial
stability by 1.65%. Significant inflation surprises
can cause market volatility and raise the likelihood
of an uncontrolled asset revaluation. Market
participants attempt to predict how central banks
may react to preserve price stability when faced
with an inflation shock. Furthermore, the real value
of outstanding debt may reduce with a higher-than-
expected increase in inflation.
The result of economic volatility uncertainty and
financial stability was not significant at the 1% level
indicating that economic volatility uncertainty has a
greater impact on financial stability in nations with
higher levels of competition, lower levels of capital
adequacy, and weaker financial systems. Therefore,
the administration should not just recognize that
regulations themselves influence the economy but
also pay attention to the consequences of the
volatility caused by frequent reforms in the financial
system. This is because economic policy uncertainty
has a significant influence on investor sentiment and
financial stability. Therefore, while creating
policies, the government should carefully assess
whether they are consistent with the actual norms of
society and should pay closer attention to how
frequently policies are released and changed. In
conclusion, 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 of India.
5 Policy Implications
Cryptocurrencies have seen reputational damage
since 2021 due to many scandals and measures need
to be taken by the regulatory agencies in terms of
crypto investments to protect Indian retail investors.
Furthermore, the results also identified positive and
significant cointegration between economic growth
and financial stability. Due to most transactions in
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
74
Volume 2, 2023
the economy is done through the financial system, it
is paramount for economic growth. Financial
instability may lead to bank runs, a stock market
crash, and hyperinflation and it can severely shake
financial and economic confidence. The latest
Global Financial Stability report in 2021 by
International Monetary Fund (IMF) described the
risk posed by the crypto ecosystem due to a lack of
strong operational, governance and risk practices.
Thus, it is recommended to policymakers, regulators
and supervisors monitor rapid developments in the
crypto ecosystem and the instability they create in
the financial system. Regulators should also
emphasize the risk that crypto poses to economic
functions. Time is important, and appropriate action
needs to be taken that must be broad, quick and
well-coordinated to address the vulnerabilities.
Risks to financial stability have so far been kept
in check thanks to continuing governmental support
as the world navigates the pandemic. However,
there are still many sectors with high financial
vulnerabilities. The inflation outlook continues to
raise concerns, and some market segments have
overvalued assets. Despite rising funding costs,
emerging and frontier markets still have significant
financing needs. Some nonbank financial
organizations are experiencing increased risks as
they strive to increase yield to satisfy return
objectives. Cryptocurrencies may impair capital
account control in developing economies, which
may affect the management of exchange rates. In
addition, disintermediation from the established
financial system caused by cryptocurrencies can
undermine financial stability.
References:
[1] Yan, L., N. Mirza, and M. Umar, The
cryptocurrency uncertainties and investment
transitions: Evidence from high and low
carbon energy funds in China. Technological
Forecasting and Social Change, 2022. 175: p.
121326.
https://doi.org/https://doi.org/10.1016/j.tech
fore.2021.121326
[2] Khusboo, N., RBI Governor: Cryptos have no
underlying asset… not even a tulip, in The
Indian Express. 2022, The Indian Express:
Mumbai.
https://indianexpress.com/article/business/b
anking-and-finance/cryptocurrencies-a-
threat-to-financial-stability-of-india-rbi-
governor-shaktikanta-das-7766158/
[3] Anulekha, R., Govt committee recommends a
ban on cryptocurrency in India, in
livemint.com. 2022, Livemint: India.
https://www.livemint.com/market/cryptocu
rrency/govt-committee-says-ban-all-
cryptocurrencies-except-those-issued-by-
state-fm-11612866715432.html
[4] Leonard, D. and H. Treiblmaier, Can
cryptocurrencies help to pave the way to a
more sustainable economy? Questioning the
economic growth paradigm, in Business
transformation through Blockchain. 2019,
Springer: Cham. p. 183-205.
https://doi.org/https://doi.org/10.1007/978-
3-319-99058-3_7
[5] Corbet, S., et al., Exploring the dynamic
relationships between cryptocurrencies and
other financial assets. Economics Letters,
2018. 165: p. 28-34.
https://doi.org/https://doi.org/10.1016/j.eco
nlet.2018.01.004
[6] Gil-Alana, L.A., E.J.A. Abakah, and M.F.R.
Rojo, Cryptocurrencies and stock market
indices. Are they related? Research in
International Business and Finance, 2020. 51:
p. 101063.
https://doi.org/https://doi.org/10.1016/j.riba
f.2019.101063
[7] Jacobs, G., Cryptocurrencies & the challenge
of global governance. Cadmus, 2018. 3(4): p.
109-123.
[8] Mishkin, F.S., International experiences with
different monetary policy regimes). Any views
expressed in this paper are those of the author
only and not those of Columbia University or
the National Bureau of Economic Research.
Journal of monetary economics, 1999. 43(3): p.
579-605.
https://doi.org/https://doi.org/10.1007/BF0
1193536
[9] Chakravaram, V., et al., Cryptocurrency:
Threat or Opportunity, in ICCCE 2020. 2021,
Springer. p. 747-754.
[10] Creel, J., P. Hubert, and F. Labondance,
Financial stability and economic performance.
Economic Modelling, 2015. 48: p. 25-40.
https://doi.org/https://doi.org/10.1016/j.eco
nmod.2014.10.025
[11] Annie, N., Cryptocurrencies could lead to
financial instability in cnbc.com. 2021: USA.
https://www.cnbc.com/2021/10/13/cryptoc
urrencies-could-lead-to-financial-
instability-author-warns.html
[12] Chiu, J. and T.V. Koeppl, The economics of
cryptocurrencies–bitcoin and beyond, in Bank
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
75
Volume 2, 2023
of Canada Staff Working Paper, No. 2019-40,
Bank of Canada, Ottawa. 2017.
[13] Lu, C., Cryptocurrency and Digital Assets: A
Positive Tool for Economic Growth in
Developing Countries. Available at SSRN
4177415, 2022.
https://doi.org/http://dx.doi.org/10.2139/ssr
n.4177415
[14] Miśkiewicz, R., K. Matan, and J. Karnowski,
The Role of Crypto Trading in the Economy,
Renewable Energy Consumption and
Ecological Degradation. Energies, 2022.
15(10): p. 3805.
https://doi.org/https://doi.org/10.3390/en15
103805
[15] Jati, W., et al., Correlation of Financial
Innovation, Stock Market, Cryptocurrency on
Economic Growth. Economics Development
Analysis Journal, 2022. 11(3): p. 329-338.
https://doi.org/https://doi.org/10.15294/edaj
.v11i3.57121
[16] Dasman, S., Analysis of return and risk of
cryptocurrency bitcoin asset as investment
instrument. Accounting and Finance
Innovations, 2021: p. 51.
https://doi.org/https://doi.org/10.5772/intec
hopen.99910
[17] Mikhaylov, A., M.S.S. Danish, and T. Senjyu,
A New Stage in the Evolution of
Cryptocurrency Markets: Analysis by Hurst
Method, in Strategic outlook in business and
finance innovation: Multidimensional policies
for emerging economies. 2021, Emerald
Publishing Limited: Bingley.
https://doi.org/https://doi.org/10.1108/978-
1-80043-444-820211004
[18] Mishkin, F.S., Anatomy of a financial crisis.
Journal of evolutionary Economics, 1992. 2(2):
p. 115-130.
https://doi.org/https://doi.org/10.1007/BF0
1193536
[19] Ankenbrand, T. and D. Bieri, Assessment of
cryptocurrencies as an asset class by their
characteristics. Investment management and
financial innovations, 2018. 15( 3): p. 169-181.
https://doi.org/http://dx.doi.org/10.21511/i
mfi.15(3).2018.14
[20] Katsiampa, P., Volatility estimation for Bitcoin:
A comparison of GARCH models. Economics
Letters, 2017. 158: p. 3-6.
https://doi.org/https://doi.org/10.1016/j.eco
nlet.2017.06.023
[21] Koutmos, D., Bitcoin returns and transaction
activity. Economics Letters, 2018. 167: p. 81-
85.
https://doi.org/https://doi.org/10.1016/j.eco
nlet.2018.03.021
[22] Uzonwanne, G., Volatility and return spillovers
between stock markets and cryptocurrencies.
The Quarterly Review of Economics and
Finance, 2021. 82: p. 30-36.
https://doi.org/https://doi.org/10.1016/j.qref
.2021.06.018
[23] Jeribi, A., S.K. Jena, and A. Lahiani, Are
cryptocurrencies a backstop for the stock
market in a covid-19-led financial crisis?
Evidence from the nardl approach.
International Journal of Financial Studies,
2021. 9(3): p. 1-36.
https://doi.org/https://doi.org/10.3390/ijfs9
030033
[24] Conlon, T., S. Corbet, and R.J. McGee, Are
cryptocurrencies a safe haven for equity
markets? An international perspective from the
COVID-19 pandemic. Research in International
Business and Finance, 2020. 54: p. 101248.
https://doi.org/https://doi.org/10.1016/j.riba
f.2020.101248
[25] Hollis, D., et al., HadUK
‐
Grid—A new UK
dataset of gridded climate observations.
Geoscience Data Journal, 2019. 6(2): p. 151-
159.
https://doi.org/https://doi.org/10.1002/gdj3.
78
[26] Khan, M.W.A., et al., Investigating the
dynamic impact of CO2 emissions and
economic growth on renewable energy
production: Evidence from FMOLS and DOLS
tests. Processes, 2019. 7(8): p. 496.
https://doi.org/https://doi.org/10.3390/pr70
80496
[27] Pradhan, K.C., Does remittance drive economic
growth in emerging economies: Evidence from
FMOLS and Panel VECM. Theoretical &
Applied Economics, 2016. 23(4): p. 57-74.
[28] Mbilla, S.A.E., et al., Monetary policy and
macro economic indicators: A review of a
developing country’s perspectives 2002–2017.
Cogent Economics & Finance, 2021. 9(1): p.
1935530.
https://doi.org/https://doi.org/10.1080/2332
2039.2021.1935530
[29] Gopane, T.J. The Interest Rate Behaviour of
Bitcoin as a Digital Asset. in International
Conference on Digital Economy. 2019. Cham:
Springer.
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
76
Volume 2, 2023
[30] Xu, X., et al., A taxonomy of blockchain-based
systems for architecture design, in 2017 IEEE
international conference on software
architecture (ICSA). 2017, IEEE. p. 243-252.
[31] Al Kawasmi, E., E. Arnautovic, and D.
Svetinovic, Bitcoin
‐
based decentralized
carbon emissions trading infrastructure model.
Systems Engineering, 2015. 18(2): p. 115-130.
https://doi.org/https://doi.org/10.1002/sys.2
1291
[32] Mare, D.S., F. Moreira, and R. Rossi,
Nonstationary Z-score measures. European
Journal of Operational Research, 2017. 260(1):
p. 348-358.
https://doi.org/https://doi.org/10.1016/j.ejor
.2016.12.001
[33] Kasman, S. and A. Kasman, Bank competition,
concentration and financial stability in the
Turkish banking industry. Economic Systems,
2015. 39(3): p. 502-517.
https://doi.org/https://doi.org/10.1016/j.eco
sys.2014.12.003
[34] Phan, D.H.B., et al., Economic policy
uncertainty and financial stability–Is there a
relation? Economic Modelling, 2021. 94: p.
1018-1029.
https://doi.org/https://doi.org/10.3389/fpsy
g.2021.63183
[35] Abbasi, K.R., et al., How energy consumption,
industrial growth, urbanization, and CO2
emissions affect economic growth in Pakistan?
A novel dynamic ARDL simulations approach.
Energy, 2021. 221: p. 119793.
[36] Panigrahi, S., Economic Value Added and
traditional accounting measures for
shareholder's wealth creation. Panigrahi, SK
(2017). Economic Value Added and Traditional
Accounting Measures for Shareholder’s Wealth
Creation. Asian Journal of Accounting and
Governance, 2017. 8: p. 125-136.
[37] Eichengreen, B., Exchange rate stability and
financial stability. Open Economies Review,
1998. 9(1): p. 569-608.
[38] Golovnin, M. and G. Oganesian. The
relationship between financial stability
indicators and exchange rate in Russia. in
Being a Paper Submitted to Management
International Conference, Bled, Slovenia. 2018.
Solvenia.
Contribution of individual authors to the
creation of a scientific article (ghostwriting
policy)
Shrikant Panigrahi has organized the manuscript and
was responsible for the statistical implementation.
Sources of funding for research presented in
a scientific article or scientific article itself
The author received no funding for this paper.
Conflict of Interest
The author certifies that there are no known
financial conflicts of interest or close personal ties
that would have seemed to have an impact on the
work disclosed in this paper.
Creative Commons Attribution License 4.0
(Attribution 4.0 International , CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/deed.en
_US
International Journal of Applied Sciences & Development
DOI: 10.37394/232029.2023.2.8
Shrikant Krupasindhu Panigrahi
E-ISSN: 2945-0454
77
Volume 2, 2023
