Empirical Study on Determinants of Foreign Exchange Rates with Reference to Indian Rupee v/s US Dollar

Abstract

Foreign exchange rate is the price of a unit of foreign currency in terms of the domestic currency. The Indian Rupee (INR) was never highly valued in comparison to the Unites States Dollar (USD). Fluctuation in the currency exchange rates has had serious ramifications for the Indian economy. Therefore, exchange rates are among the most monitored analyzed and governmentally manipulated economic measures. There are various factors influencing for fluctuations in the exchange rate of Indian Rupee such as, Gross Domestic Growth Rates (GDP), Average Inflation Rate (WPI), Balance of Payment, Interest Lending Rates, Forex Reserves, Foreign Investment, etc., The study is based on secondary data covering thirteen annual year information from2000-2001 to 2012-13. This has been collected from official websites of Reserve Bank of India, Planning Commission of India, Central Statistical Organisation and various other reports. The statistical tools applied for data analysis is descriptive and inferential statistics. It is concluded that Global economic outlook (Gross Domestic Product Growth Rates) along with unfavorable balance of payment and Foreign Investment flows which will determine the future of INR. Foreign exchange rate is the price of a unit of foreign currency in terms of the domestic currency. Foreign exchange rate is determined much in the same way as the price of any commodity in a free market economy. For an emerging economy like India, an appropriate balance among stability in the price level, highly sustainable economic growth, and reduction in the exchange rate volatility is required for the growth and development of the economy and also reflection of sound state of the economy to the rest of the world. These three objectives cannot be achieved simultaneously. The Indian Rupee (INR) was never highly valued in comparison to the Unites States Dollar (USD). Until sub-prime crisis of 2008, the exchange rate of the USD against the INR was roughly steady at around 45.00, thereafter some effects of the crisis, as well as responses to the crisis by regulatory authorities all over the world led to a fluctuation in the currency exchange rates, hitting nearly one-seventieth of the US Dollar. This has had serious ramifications for the Indian economy, as the US Dollar is one of the most widely used global currencies. Grim global economic outlook (GDP Growth Rates) along with unfavorable balance of payment and Foreign Investment outflows has contributed to this Forex determinants. Very important monetary policy tool is the exchange rate for emerging economies like India. Quite frequent intervention in the foreign exchange market than their advanced economy counterparts reflects economies' greater vulnerability to exchange rate shocks and less developed financial markets. Exchange rates play a vital role in a country's level of trade, which is critical to almost every free market economy in the world. Therefore, exchange rates are among the most monitored analyzed and governmentally manipulated economic measures. Exchange rate matters impacts the real return of an investor's portfolio, profitability of firms, purchasing power of income, capital gains from domestic securities, income factors, FDI and growth of specific sectors. Exchange rate affects trading relationships between two nations. There are various factors influencing for fluctuations in the exchange rate of Indian Rupee such as, Gross Domestic Growth Rates (GDP), Average Inflation Rate (WPI), Balance of Payment, Interest Lending Rates, Forex Reserves, Foreign Investment, etc.