The Determinants of Foreign Exchange Rate (FER) Volatility in the Indian Economy

Piyush Sharma ., Shivam Rai .

Abstract


The purpose of this paper is to investigate whether some prominent factors in the Indian Economy have any impact on foreign exchange rate volatilities of Indian currency. This paper also identifies which foreign currency is most important exchange currency in the international exchange market, with respect to the Indian Rupee. The research paper makes an enquiry to find out, what is the causality between the Gross Domestic Product (GDP) growth rates, Index of Industrial Production (IIP)and the Wholesale Price Indexes (WPI) with the USD/INR exchange rates. The paper also tries to formulate the causality between the Stock Market in India (BSE 30 in our case) with the USD/INR exchange rate values.

After establishing and formulating the causality relation of USD/INR values with the above important parameters of the Indian Economy, namely, GDP growth rates, IIP values and the WPI values and with BSE 30 indexes, the paper proceeds to investigate as to what extent these above indexes determine the volatilities in the USD/INR rates. Finally, the research tries to find out the correlation between these determinants of USD/INR rates.


Keywords


Indian economy, foreign exchange rate volatility, linear regression, granger causality, auto correlation function, GDP, IIP, WPI.

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