Exchange rate and the economic growth in India: An empirical analysis

• Published date: 01 May 2021
• Author: Khulsum Shaik,Babu Rao Gona
• Date: 01 May 2021
• DOI: http://doi.org/10.1002/pa.2177

ACADEMIC PAPER

Exchange rate and the economic growth in India: An empirical

analysis

Khulsum Shaik | Babu Rao Gona

Department of Economics, Dr. Abdul Haq

Urdu University, Kurnool, India

Correspondence

Dr. Babu Rao Gona, Assistant Professor,

Department of Economics, Dr. Abdul Haq

Urdu University, Kurnool-518002, Andhra

Pradesh, India.

Email: baburaopcu@gmail.com

In the present globalization economic world, exchange rate plays a major role in

every country's economic activity. Here, exchange rate policy has been identified as

one of the endogenous factors that can affect the economic performance of a nation.

Exchange rate plays a key role in international economic transactions because no

nation can remain in isolation due to varying factor endowment. Movements in the

exchange rate have ripple effects on other economic growth. The study used second-

ary data that were collected from the World Development Indicators data base and

analysed. The study used the ordinary least square and VECM Granger Causality

method of estimation for data covered the period from 1990 to 2017. The results

from the econometric analyses show that there is a short-run relationship between

exchange rate, inflation rate, interest rate and GDP. The result obtained from the unit

root analysis indicates that least one time series variable property is stationary. The

study concludes that in India, the factors that influence the level of growth rate are

extent of exchange rate and its variables. Based on the findings, from the Granger

causality investigation procedure at 5% critical value are EXCH, INT, INF, IMP and

EXP among other variables that affect economic growth. The study recommends the

need to be technologically inclined in all sectors of Indian economy; excess and over

budgetary inflation and implementation should be cut to barest minimal level to avert

the ideal of external borrowing which most consequently result in external debt and

services. The Indian government should show the path of redirecting its investment

profile by channelling it towards capital projects of the government.

JEL CLASSIFICATION

D51; E00; E6; F430; G010

1|INTRODUCTION

Exchange rate refers to the value of one currency (the domestic cur-

rency) in relationship to another (foreign currency). It can also be

defined as the price at which one unit of a country's domestic cur-

rency exchanges for any other country in the world. Osiegbu and

Onuorah (2011) posit that exchange rate plays a key role in interna-

tional economic transactions because no nation can remain in isola-

tion due to varying factor endowment. Movements in the exchange

rate have screwed up effects on other economic variables such as

interest rate, inflation rate, import, export and output, and so

on. These facts underscore the importance of exchange rate to the

economic well-being of every country that opens its doors to interna-

tional trade in goods and services. The importance of exchange rate

derives from the fact that it connects the price systems of two differ-

ent countries making it possible for international trade to make direct

comparison of traded goods. In other words, it links domestic prices

with international prices. Through its effects on the volume of imports

and exports, exchange rate exerts a powerful influence on a country's

balance of payments position.

In emerging market economies like India, exchange rate has

gained more importance after adoption of flexible exchange rate

Received: 6 April 2020 Accepted: 2 May 2020

DOI: 10.1002/pa.2177

J Public Affairs. 2021;21:e2177. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of9

https://doi.org/10.1002/pa.2177