An Analysis Of The Factors Affecting The Indian Rupee Volatility

Abstract

—Exchange rates connects the domestic and the international markets for goods and services. It
signals competitiveness of a country’s exchange power with the rest of the worlds in a global market. It has
the potential to have an impact on the economic welfare of the nation. The study of exchange rate and its
relationship with different variables gained considerable importance in the last few decades. It becomes an
important issue for professionals and researchers mostly for developing countries. From 1972 many
developing countries bought a shift in their exchange rate policy from a fixed system to a floating exchange
rate regime as a measure to control exchange rate volatility. This study would help in a thorough
understanding of the sources of fluctuations of the exchange rate which is essential to design a more
effective macroeconomic policy. This paper gives a brief view of the Indian Rupee in terms of fluctuations
in the Indian Rupee against various currencies such USD, EURO, Japanese Yen and Pound, Foreign
exchange reserve, and foreign exchange market turnover in India. The paper tries to analyze the factors
affecting the Indian rupee volatility. Monthly data from April 2013 to March 2020 has been used for the
study. From the graphical and trend analysis it is found that rising crude oil prices, increasing current
account deficit, decreasing interest rates, increasing withdrawals by Foreign Institutional Investors, decrease
in Foreign Direct Investments and decreasing Gross Domestic Product growth rates have contributed to the
depreciation of the rupee against the US Dollar