Analysis of Macro-Economic Determinants of Exchange Rate Volatility in India

Abstract

The present study investigates the macroeconomic determinants of exchange rate volatility in India for the period from 2010-11 to 2023-24. Exchange rate stability is important for economic growth, international trade, foreign investment, inflation control and financial stability. This study aims to analyze the trend of Indian Rupee against US Dollar and to find out its relationship with selected macroeconomic variables such as inflation, interest rate, Gross Domestic Product, current account balance, Foreign Direct Investment and external debt. The study is based on time series data and the analysis takes into account a total of annual observations. The selected macroeconomic variables are examined using descriptive statistics and Pearson correlation analysis. The results revealed that Indian Rupee has shown overall deprecating trend against the US Dollar during the period of study and it indicate a significant negative relationship between exchange rate and inflation, and exchange rate and interest rate. It is observed that there is a very strong positive relationship between exchange rate and GDP and exchange rate and external debt. However, the relationship between exchange rate and current account balance and between exchange rate and FDI is weak and statistically insignificant. The study also reveals that the exchange rate movements in India are influenced by domestic and international economic factors. Therefore, a technique needs to be found to effectively manage inflation, interest rates, external debt, foreign exchange reserves and investment flows to sustain exchange rate stability. The study provides suggestions for policymakers to evolve appropriate economic policies to curb exchange rate volatility and support sustainable economic growth.