Determinants of Exchange Rate in India

20 Pages Posted: 22 Jul 2008 Last revised: 25 Jul 2008

Date Written: April 21, 2008

Abstract

Appreciation or depreciation of the domestic currency depends on the supply of foreign exchange reserves, liquidity conditions in the economy as determined by money supply, central bank's policy intentions and differences in the interest yield on dated securities of the concerned economies. The present research tests validity of this hypothesis in association with the exchange rate between the Indian rupee and the US dollar. In particular, an attempt is made to investigate the impact of bank rate policy of the Reserve Bank of India (RBI) and interest yield differentials between the India and the US securities. Impact of broad money supply and foreign exchange reserves is also analyzed. A monthly time series from April 1996 to June 2007 is used for the purpose. It is observed that the monetary policy intentions depicted by the bank rate of the RBI, the short-term and long-term domestic interest differentials and interest yield differentials, and the rate of change of foreign exchange reserves have a significant impact on the monthly average of the exchange rate between Indian rupee and the US dollar and quite in line with the economic theory.

Keywords: Foreign exchange rate, interest yield differentials

JEL Classification: E51, E52, F31

Suggested Citation

Suthar, Mita H., Determinants of Exchange Rate in India (April 21, 2008). Available at SSRN: https://ssrn.com/abstract=1165602 or http://dx.doi.org/10.2139/ssrn.1165602

Mita H. Suthar (Contact Author)

H. L. Institute of Commerce ( email )

Navrangpura, Ahmedabad-380009
Gujarat
India

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