Exchange rate and the economic growth in India: An empirical analysis

Abstract

In the present globalization economic world, exchange rate plays a major role in every country's economic activity. Here, exchange rate policy has been identified as one of the endogenous factors that can affect the economic performance of a nation. Exchange rate plays a key role in international economic transactions because no nation can remain in isolation due to varying factor endowment. Movements in the exchange rate have ripple effects on other economic growth. The study used secondary data that were collected from the World Development Indicators data base and analysed. The study used the ordinary least square and VECM Granger Causality method of estimation for data covered the period from 1990 to 2017. The results from the econometric analyses show that there is a short‐run relationship between exchange rate, inflation rate, interest rate and GDP. The result obtained from the unit root analysis indicates that least one time series variable property is stationary. The study concludes that in India, the factors that influence the level of growth rate are extent of exchange rate and its variables. Based on the findings, from the Granger causality investigation procedure at 5% critical value are EXCH, INT, INF, IMP and EXP among other variables that affect economic growth. The study recommends the need to be technologically inclined in all sectors of Indian economy; excess and over budgetary inflation and implementation should be cut to barest minimal level to avert the ideal of external borrowing which most consequently result in external debt and services. The Indian government should show the path of redirecting its investment profile by channelling it towards capital projects of the government.