An investigation of the factors affecting Indian exchange rate: an analysis

Abstract

Exchange rate plays a key role in the country's level of trade and has a large impact on world trade and financial flows. In case of multinational companies, a precise forecasting and less volatility of exchange rate help in improving their overall profitability. Both political and economic factors influence exchange rates (Huang et al., 2004). In India, exchange rate has been highly volatile due to many a factors such as fluctuation in FII money flows, differences in rate of return or interest rates between countries, inflation, oil prices, etc. Exchange rate has been a topic of detailed study for policy making circles. The present research study seeks to investigate and analyse the impact of determinants such as GDP at constant prices, inflation levels, interest rates, current account deficit, inflow of foreign institutional investment, foreign exchange reserves and price of crude oil and gold on the USD-INR exchange rate based on quarterly data from April 1999-January 2017. The study also seeks to determine the relationship between the independent variables and the dependent variable, i.e., exchange rate in the short run and long run based on the Johansen cointegration test, augmented Dickey-Fuller test and vector error correction model.