An impact of bank rate and inflation rate on volatility of foreign exchange rate in India

Abstract

Foreign exchange rate, inflation rate and bank rate are important macro-economic factors that determine the growth of the Indian economy. The main purpose of this study is to analyse the effect of two important macro-economic factors viz - bank rate and inflation rate on fluctuating foreign exchange rate. This study is based on secondary data and the time period from 2009-2010 to 2017-2018 is considered for this study. Bivariate correlation and regression model are used to investigate and analyse the effect of both variables on foreign exchange rate. It is found that the relationship between bank rate and USD/INR is positive while the association between inflation rate and foreign exchange rate is highly negative. Besides, there is considerable effect of both factors on USD/INR. Hence, efficient monetary policy by the government and RBI need to be initiated to reduce and stabilize both rates and alleviate the value of Indian Rupees.