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Volume 3, Issue 2

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Volume 3, Issue 2

A Study on Exchange Rate Volatility and its Macro Economic Determinants in India

Author(s)

Swati Thakur and Rakesh Kumar Srivastava

Affiliations
  1. Economics, Planning & Development, Gautam Buddha University, Greater Noida, UP
  2. School of Management, Gautam Buddha University, Greater Noida, UP
Abstract

Purpose: The present paper aims to identify macro-economic determinants that affect the exchange rate of INR-US $ and linearity in their correlation during 2005-2015. The study also examined the factors causing fluctuations of INR against the US$ in the same time period.

Design / Methodology / Approach: The nature of research is empirical & analytical that tests hypothesis by analyzing a data-set and used linear correlation Analysis between the exchange rate INR/USD and the chosen macro-economic determinants. The study undertakes mainly five independent determinants that influence the exchange rate in India: Inflation (CPI), Lending interest rate, External debt (in current US$), GDP (in current US$) and FDI (in current US$).

Findings: It is observed that exchange rate is highly correlated with the selected independent variables taken up for this study, except with the Inflation (r = –0.003). There is huge positive correlation between the Exchange rate of INR/USD and external debt (r = 0.904). A negative correlation exists between exchange rate and lending interest rate (r = –0.432). The correlation between the exchange rate and GDP is also high at (r = 0.809). And, a mild positive correlation exists between exchange rate and FDI (r = 0.293).

Research Implications: A strong correlation between the dependent variable exchange rate & independent macroeconomic variables suggests improving Export to GDP ratio along with promoting foreign capital especially FDI to improve the INR/US $ exchange rate.

Originality/Value: Volatility in exchange rates causing the instability in international trade & business, and analyzing those macroeconomic factors that affect volatility in exchange rate have both theoretical & practical significance.

Keywords

US$/INR Exchange Rate, INR & US$, Macro-economic Factors.

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