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

  • Sathish PACHIYAPPAN School of Business and Management, CHRIST (Deemed to be University), Bangalore, India
  • Ananya JAIN School of Business and Management, CHRIST (Deemed to be University), Bangalore, India
  • V John Paul RAJ School of Business and Management, CHRIST (Deemed to be University), Bangalore, India
  • Saravanan VELLAIYAN School of Business and Management, CHRIST (Deemed to be University), Bangalore, India
DOI: https://doi.org/10.14505/tpref.v14.2(28).06

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.

References

[1] Alejandro, C. F. D. 1982. Exchange rates and terms of trade in the Argentine Republic, 1913–1976. In Trade, stability, technology, and equity in Latin America (pp. 27-41). Academic Press. DOI:https://doi.org/10.1016/B978-0-12-680050-0.50008-8
[2] Azid, T., Jamil, M., Kousar, A., and Kemal, M. A. 2005. Impact of exchange rate volatility on growth and economic performance: A case study of Pakistan, 1973-2003 [with comments]. The Pakistan development review, 749-775. Available at: https://www.jstor.org/stable/41261129
[3] Cassel, G. 1918. Abnormal deviations in international exchanges. The Economic Journal, 28(112): 413-415. DOI: https://doi.org/10.2307/2223329
[4] Charles, A. M., Kiliza, K. R., and Sarwatt, A. C. 2022. Economic Factors Affecting the Volatility of Exchange Rate in Tanzania. In International Journal of Arts (Vol. 4, Issue 2). Available at: https://www.ijahss.in
[5] Chen, S. S. 2006. Revisiting the interest rate–exchange rate nexus: a Markov-switching approach. Journal of Development Economics, 79(1): 208-224. DOI: https://doi.org/10.1016/j.jdeveco.2004.11.003
[6] Edison, H.J., and Pauls, B.D. 1993. A re-assessment of the relationship between real exchange rates and real interest rates: 1974–1990. Journal of Monetary Economics, 31(2): 165-187. DOI:https://doi.org/10.1016/0304-3932(93)90043-F
[7] Edwards, S. 1989. Exchange rate misalignment in developing countries. The World Bank Research Observer, 4(1): 3-21. DOI: https://doi.org/10.1093/wbro/4.1.3
[8] Hasan, S. M., and Islam, R. (n.d.). SADI International Journal of Management and Accounting UNDERSTANDING THE RELATIONSHIP BETWEEN MACROECONOMIC VARIABLES AND EXCHANGE RATES 1. SADI International Journal of Management and Accounting, 9. Available at: https://sadipub.com/Journals/index.php/SIJMA/index|editorial@sadipub.comhttps://sadipub.com/Journals/index.php/SIJMA/index
[9] Karl, H., and Canales, K. 2004. Foreign exchange market organization in selected developing and transition economies: Evidence from a survey “IMF working paper 04/4, Washington international monetary Fund. Available at: https://ssrn.com/abstract=878827
[10] Keynes, J. M. 1923. A Reply to Sir William Beveridge. The Economic Journal, 33(132): 476-486. DOI:https://doi.org/10.2307/2222885
[11] Kraay, A. 1999. “Do High Interest Rates Defend Currencies during Speculative Attacks?” mimeo, World Bank. DOI: https://doi.org/10.1016/S0022-1996(02)00021-1
[12] MacDonald, R., and Nagayasu, J. 2000. The long-run relationship between real exchange rates and real interest rate differentials: A panel study. IMF staff papers, 47(1): 116-128. DOI:https://doi.org/10.2307/3867627
[13] MacDonald, R., and Taylor, M. P. 1991. Exchange rates, policy convergence, and the European Monetary System. The Review of Economics and Statistics, 553-558. DOI: https://doi.org/10.2307/2109585
[14] Madura, J. 2006. Exchange rate determination, International Corporate Finance. Thomson/South-Western.
[15] Malekhosseini, H., Tayebi, S. K., Rafat, M., and Yazdani, M. 2019. Evaluation of Exchange Rate Regime’s Effect on Real Exchange Rate Misalignment: An Application of Propensity Score Matching Approach. Iranian Journal of Economic Research, 27(93): 87–114. DOI: https://doi.org/10.22054/ijer.2022.62893.1026
[16] McPherson, M. F., and Rakovski, T. 2000. Exchange Rates and Economic Growth in Kenya: An Econometric Analysis. Available at: https://citeseerx.ist.psu.edu/document?repid=rep1andtype=pdfanddoi=7875b2157e1738182feb94d20ce35bd93b8dad92
[17] McPherson, M. F., and Rakovski, T. 2000. Exchange Rates and Economic Growth in Kenya: An Econometric Analysis. Available at: https://citeseerx.ist.psu.edu/document?repid=rep1andtype=pdfanddoi=7875b2157e1738182feb94d20ce35bd93b8dad92
[18] Menkhoff, L. 2013. Foreign Exchange Intervention in emerging markets: A survey of empirical studies. The World Economy, 36(9): 1187–1208. DOI: https://doi.org/10.1111/twec.12027
[19] Obstfeld, M., and Rogoff, K. 1995. Exchange rate dynamics redux. Journal of political economy, 103(3): 624-660. https://www.journals.uchicago.edu/doi/epdf/10.1086/261997
[20] Rafiq, S., Rafiq, F., Rafiq, R., and Rafiq, F. 2023. Determinants of Exchange Rate: A Case Study of Pakistan. Review of Education, Administration and Law, 6(2): 449–456. DOI:https://doi.org/10.47067/real.v6i2.341
[21] Ramasamy, R., and Abar, S. K. 2015. Influence of macroeconomic variables on exchange rates. Journal of economics, Business and Management, 3(2): 276-281. DOI: 10.7763/JOEBM.2015.V3.194
[22] Sauer, C., and Bohara, A. 2001. Exchange Rate Volatility and Exports: Regional Differences between Developing and Industrialized Countries. Review of International Economics, 9(1): 133-152. DOI:https://doi.org/10.1111/1467-9396.00269
Published
2023-12-20
How to Cite
PACHIYAPPAN, Sathish et al. Exploring the Influence Dynamism of Economic Factors on Fluctuation of Exchange Rate - An Empirical Investigation for India Using ARDL Model. Theoretical and Practical Research in Economic Fields, [S.l.], v. 14, n. 2, p. 258 - 268, dec. 2023. ISSN 2068-7710. Available at: <https://journals.aserspublishing.eu/tpref/article/view/8212>. Date accessed: 29 apr. 2024. doi: https://doi.org/10.14505/tpref.v14.2(28).06.
Citation Formats
Issue
Vol 14 No 2 (2023): TPREF, Volume XIV, Issue 2(28), Winter 2023
Section
Articles

Non-Exclusive License under Attribution 4.0 International Public License (CC BY 4.0):

This ‘Article’ is distributed under the terms of the license CC-BY 4.0., which lets others distribute, remix, adapt, and build upon this article, even commercially, as long as they credit this article for the original creation. ASERS Publishing will be acknowledged as the first publisher of the Article and a link to the appropriate bibliographic citation (authors, article title, volume issue, page numbers, DOI, and the link to the Published Article on ASERS Publishing’ Platform) must be maintained.