Exchange Rate Case Study

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SUHANI MADAAN, M.A. ECONOMICS , A6030115037 INTRODUCTION Exchange rate between the two currencies is the rate at which one currency is exchanged for another currency. It can also be regarded as the value of the currency of one country in relation to the currency of the other country. The fluctuations in the exchange rate occur when the values of either component currencies change. There are various factors that lead to the determination and fluctuation in exchange rate which could be inflation rate, rate of interest, public debt, current account balance, political stability, economic performance and terms of trade. There could be other factors as well but they are relatively of less importance. Therefore, these factors serve as the explanation…show more content…
Capital and Financial account The principles of double entry accounting are used to record any transaction in the balance of payments account. Balance of payments account should be stable. In other words, it should not be in deficit and in surplus because both conditions are unfavorable. Exchange rate fluctuations and its impact on the volume of international trade is an important subject of empirical research after the adoption of floating exchange rate in 1973. Therefore, this study focuses on the determinants of exchange rate and its impact on the balance of payments of India. Exchange rate is an important determinant of the balance of payments position of any country. This is because the countries experiencing appreciation of home currency will lead to 3increase in the price of exports for that country in the international market and inexpensive imports. Also, if it is judiciously and efficiently utilized, it can serve as a nominal anchor for the price stability. Fluctuations in the exchange rate have a direct effect on the demand and supply of goods, employment, investment and distribution of income and wealth. Exchange rates are shared macroeconomic variables. Therefore, its fluctuations for any internationally integrated economy have counterpart effects in its trading…show more content…
In the first step, Ordinary Least Squares (OLS) estimation has been used in order to estimate the coefficients of multiple regression equation. In the regression equation, exchange rate is taken as the dependent variable and its determinants such as current account balance, total exports, rate of interest and the external debt are taken as the independent variables. The second step consists of studying the relationship between the exchange rate and the balance of payments of India by employing the unit root tests, VAR lag order selection criterion followed by the Auto-Regressive Distributed Lag (ARDL) model and the bounds test. The study deals with the time series data for a period of 1991-92 to 2015-16 which has been collected from Reserve Bank of India (RBI), International Monetary Fund (IMF), and the World

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