Determinants of Indian Exchange Rate
Determinants of Indian Exchange Rate
Submitted To:
Dr. S K Mathur
Associate Professor of Economics
Department of Humanities and Social Sciences
Indian Institute of Technology Kanpur
Submitted By:
Sharad Gupta
(10666)
Abstract
This Paper attempts to find out the determinant of INR-USD exchange rate. We want to see the interdependence of Exchange rate on some variables like Inflation, Money Supply, Foreign Reserve,
Fiscal Deficit and Stock market. This will also attempt to analyze the Sensitivity of exchange rate to
Indian and US Economy.
Introduction
Recent Depreciation in Indian exchange rate created havoc in the economy. Economists try to explain the situation with many different relations. Usually anywhere you read is that inflation rate differential determines the exchange rate between two countries. This means that exchange rate will change with same amount if there is a dip in one’s inflation rate or similar raise in other. But the question that ponders in mind: “Is the exchange rate sensitive to both the economies as same factors or there is some difference”.
A 10 Year history of INR-USD Exchange rate have been depicted in the graph below:
Variables
Exchange Rate: This is INR-USD exchange rate for the given data set. This can be explained as the exchange rate at which Indian rupee can be exchanged with US Dollar. Monthly data is easily available and is actually calculated by taking monthly average of the exchneg rate in Forex market.
Inflation Rates: These are monthly inflation rates of both the contries. It actially shows how much the prices have increased as compared to previous month. Tis is given In percentages and is calculated by a basket of good rather than taking all goods. This basket contains main of the consumers’ index. If inflation is more, having a constant real exchange rate will help determine the change in nominal exchange rate.
Money Supply: Increase of money supply will increase liquidity and
Submitted To:
Dr. S K Mathur
Associate Professor of Economics
Department of Humanities and Social Sciences
Indian Institute of Technology Kanpur
Submitted By:
Sharad Gupta
(10666)
Abstract
This Paper attempts to find out the determinant of INR-USD exchange rate. We want to see the interdependence of Exchange rate on some variables like Inflation, Money Supply, Foreign Reserve,
Fiscal Deficit and Stock market. This will also attempt to analyze the Sensitivity of exchange rate to
Indian and US Economy.
Introduction
Recent Depreciation in Indian exchange rate created havoc in the economy. Economists try to explain the situation with many different relations. Usually anywhere you read is that inflation rate differential determines the exchange rate between two countries. This means that exchange rate will change with same amount if there is a dip in one’s inflation rate or similar raise in other. But the question that ponders in mind: “Is the exchange rate sensitive to both the economies as same factors or there is some difference”.
A 10 Year history of INR-USD Exchange rate have been depicted in the graph below:
Variables
Exchange Rate: This is INR-USD exchange rate for the given data set. This can be explained as the exchange rate at which Indian rupee can be exchanged with US Dollar. Monthly data is easily available and is actually calculated by taking monthly average of the exchneg rate in Forex market.
Inflation Rates: These are monthly inflation rates of both the contries. It actially shows how much the prices have increased as compared to previous month. Tis is given In percentages and is calculated by a basket of good rather than taking all goods. This basket contains main of the consumers’ index. If inflation is more, having a constant real exchange rate will help determine the change in nominal exchange rate.
Money Supply: Increase of money supply will increase liquidity and
References: Venus, K and Liew, Sien (2004) “Which Lag Length Selection Criteria Should We Employ?” , The Economics Bulletin, Vol 3, No Krugman, Paul R and Obstfeld, Maurice.(2008) , “International Economics :Theory and Policy” Chunming Yuan (2011) “The exchange rate and macroeconomic determinants: Time-varying