Exploring the Influence Dynamism of Economic Factors on Fluctuation of Exchange Rate - An Empirical Investigation for India Using ARDL Model

Abstract

The Indian Foreign Exchange Market has experienced significant changes over the past decade, due to high degree of instability of the Indian Rupee leading to its devaluation against major global currencies. Exchange rate is considered as one of crucial indicators to determine the economic growth. Volatility of exchange rate of each day is influenced by various factors such as demand and supply, Gross Domestic Product, Interest rate, employment rate, public debt, balance of payments, inflation etc. Though there are multiple causes to determine the movement of exchange rate, but still the accurate level of causation is unpredictable. Keeping this in mind, this paper tries to attempt the relationship that exists between the exchange rate and select macroeconomic factors. To analyse the extent of influence of the selected variables on the exchange rate, the research paper uses 10 years of data spanning from Jan 2013 to Nov 2022. Further, the study uses monthly data of above-mentioned variables to bring out the analysis to meet the objectives. Descriptive statistics is used to find the characteristics of the data, correlation analysis and Ordinary Least Square method is used to find the relationship and impact level select macroeconomic factors on exchange rate. Autoregressive Distributed Lag (ARDL) model is used to find if any short run and long run association exists between the variables and the exchange rate.