Effects of Macroeconomic Variables on Exchange Rate Volatility: Evidence from India

Abstract

Exchangerate volatility is the fluctuation in the rate of change of domestic currency with respect to the other foreign currency. The depreciation of Indian currency is becoming a burning concern for the country. Foreign exchange is one of the most important term used in any developed or developing countries to measure the economic health. Devaluing the domestic currency lowers the trade balance impacting the balance of payment. The major objective of this paper is to investigate the macro variable factors affecting the exchange rate with respect to USD for a period of thirty years. The paper employs time series analysis to test the relationship and long run and short run causality among GDP, inflation, foreign exchange reserve, interest rate and foreign exchange rate. The result depicts that GDP and Inflation are directly related to foreign exchange rate whereas foreign exchange reserve and interest rate is inversely related to the Foreign exchange rate.