Exchange Rate Dynamics in Indian Foreign Exchange Market : An Empirical Investigation on the Movement of USD/INR

In the present study, an attempt has been made to explain the dynamics of exchange rate in Indian foreign exchange market. The empirical study is based on ‘Multiple Regression Analysis' to identify the factors that drove the exchange rate of USD/INR during the period January 1999 through March 2011. Apart from the secondary data, the primary data on exchange rate of USD/INR was collected through a questionnaire from 175 professionals across the world. The results suggest that lagged value of the dependent variable (USD/INR), current account balance, relative money supply, index of industrial production and interest rate differential are the most significant variables in determining the USD/INR exchange rate. It is also observed that forward premia, capital account and RBI's net intervention do affect exchange rates (significant at 10% level), but their impact is found to be marginal. The survey results, based on primary data, suggest that Indian foreign exchange market has become deep, liquid and efficient over a period of time. A majority of the respondents agreed that forward premia influence future exchange rates. There is a near unanimous view that RBI played a proactive role during the financial crises in the past. The results have policy implications since exchange rates affect all the sectors of the economy