EFFECT OF SELECT MACRO ECONOMIC FACTORS ON EXCHANGE RATE VOLATILITY (WITH REFERENCE TO INR/USD)

Usha B; Babitha Thimmaiah. N

doi:10.29121/shodhkosh.v5.i4.2024.4630

Authors

Mrs. Usha B Research Scholar, Department of Management Studies, VTU - Post Graduation Centre, Mysuru
Dr. Babitha Thimmaiah .N Assistant Professor, Department of Management Studies, VTU - Post Graduation Centre, Mysuru

DOI:

https://doi.org/10.29121/shodhkosh.v5.i4.2024.4630

Keywords:

Exchange Rate Volatility, Macroeconomic Factors, GARCH Model, INR/USD, Foreign Exchange Reserves

Abstract [English]

Exchange rate volatility plays a critical role in shaping a nation’s economic stability and trade competitiveness. This study examines the effect of select macroeconomic factors on INR/USD exchange rate volatility, considering their significance in the present global economic landscape. The research aims to assess how imports, Foreign Institutional Investment (FII), Wholesale Price Index (WPI), interest rates, and foreign exchange reserves influence exchange rate fluctuations. A descriptive research method was employed, utilizing secondary data from 2011 to 2023. The GARCH (Generalized Autoregressive Conditional Heteroskedasticity) model with ML - ARCH (Marquardt) - Normal distribution was applied to analyze exchange rate volatility. The study tested five hypotheses to determine the significance of macroeconomic variables in explaining exchange rate fluctuations. The findings reveal that imports, WPI, interest rates, and foreign exchange reserves have a significant impact on INR/USD exchange rate volatility, while FII does not exhibit a statistically significant effect. The results emphasize the need for effective trade policies, inflation control, and strategic Forex reserve management to ensure exchange rate stability. As global financial markets evolve, the study underscores the importance of dynamic policy frameworks to manage exchange rate risks and enhance economic resilience.

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