A Study on Exchange Rate Volatility and its
Macro Economic Determinants in India
Swati Thakur and
Rakesh Kumar Srivastava
- Economics, Planning & Development, Gautam Buddha University, Greater Noida, UP
- School of Management, Gautam Buddha University, Greater Noida, UP
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
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.
US$/INR Exchange Rate, INR &
US$, Macro-economic Factors.
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