54 Int. J. Public Sector Performance Management, Vol. 8, Nos.

1/2, 2021

An impact of bank rate and inflation rate on volatility

of foreign exchange rate in India

Fatemabibi Abubaker Salehbhai* and

Purnima Pradipkumar Jariwala
Department of Commerce,
Sir K.P. College of Commerce,
Athwalines, Surat, Gujarat, 395001, India
Email: [email protected]
Email: [email protected]
*Corresponding author

Abstract: Foreign exchange rate, inflation rate and bank rate are important
macro-economic factors that determine the growth of the Indian economy. The
main purpose of this study is to analyse the effect of two important
macro-economic factors viz – bank rate and inflation rate on fluctuating foreign
exchange rate. This study is based on secondary data and the time period from
2009–2010 to 2017–2018 is considered for this study. Bivariate correlation and
regression model are used to investigate and analyse the effect of both variables
on foreign exchange rate. It is found that the relationship between bank rate and
USD/INR is positive while the association between inflation rate and foreign
exchange rate is highly negative. Besides, there is considerable effect of both
factors on USD/INR. Hence, efficient monetary policy by the government and
RBI need to be initiated to reduce and stabilize both rates and alleviate the
value of Indian Rupees.

Keywords: US DOLLAR/INR; bank rate; inflation rate; correlation; regression

analysis; forex market; India.

Reference to this paper should be made as follows: Salehbhai, F.A. and

Jariwala, P.P. (2021) ‘An impact of bank rate and inflation rate on volatility of
foreign exchange rate in India’, Int. J. Public Sector Performance Management,
Vol. 8, Nos. 1/2, pp.54–66.

Biographical notes: Fatemabibi Abubaker Salehbhai is a research scholar and

Senior Research Fellow under Maulana Azad National Fellowship for
Minority. She obtained her MCom and MPhil degrees and is currently pursuing
her PhD. She is affiliated with Sir K.P. College of Commerce and Veer Narmad
South Gujarat Univetsity, Surat, Gujarat, India.

Purnima Pradipkumar Jariwala is an Associate Professor and the Head of the

Department of Commerce. She obtained her MCom, MPhil and PhD degrees.
She is affiliated with Sir K. P. College of Commerce, Surat, Gujarat, India.

This article is a revised and expanded version of a paper entitled ‘An impact of
bank rate and inflation rate on volatility of foreign exchange rate in India’
presented at SIMSARC-2018, The 4Cs. Communication, Commerce,
Connectivity and Culture: Implication for Business and Society, Symbiosis
Institute of Management Studies, Pune, 18–19 December2018.

Copyright © 2021 Inderscience Enterprises Ltd.

 An impact of bank rate and inflation rate on volatility 55

1 Introduction

Interest rate, inflation rate and exchange rate of a country are essential variables which
determine the growth pattern and direction of economic stability and development in a
country. An exchange rate represents a price of a nation’s currency in terms of foreign
currency. There are two elements of exchange rate, viz – domestic currency and foreign
currency. The foreign currency is defined as a base currency and domestic currency is
defined as a counter currency and the price of a unit of a foreign currency is represented
in terms of the domestic currency for direct quotation and vice versa for indirect
quotation. There are two types of exchange rates viz – fixed exchange rate and floating
exchange rate. Floating exchange rate is determined by market forces. An exchange rate
is a very volatile rate and there are many factors affecting it. Some of the leading factors
that influence the exchange rate can be include inflation rate of the country, bank rates of
the country, political stability and performance of the country, public debt of the country,
stability of the current account, terms and condition of the foreign trade, etc.
In this research paper, the bank rate and inflation rate which are declared by RBI with
monetary policy are considered to examine the impact on exchange rate volatility. The
bank rate, also known as the Discount Rate, is the oldest instrument of monetary policy.
The traditional definition of bank rate is that it is the rate at which the RBI discounts- or,
more accurately, rediscounts-eligible bills. Today, the term bank rate is used in a broader
sense and refers to the minimum rate at which the RBI provides financial accommodation
to commercial banks in the discharge of its function as the lender of the last resort. The
interest rate (bank rate) within a country depends on demand and supply of money in the
money market.
Inflation represents a sustained increase in the general level of prices for goods and
services in a county, and determined as an annual percentage change in price level. Under
conditions of inflation, the prices of goods increase over a period of time. The value of
money is defined as purchasing power which represents the amount of real, tangible
goods or actual services that money can buy at a moment of time. When inflation rate
moves up, purchasing power of the money will decrease and it will be reflected on
Foreign exchange rate of country. The purpose of this research study is to measure the
impact of inflation rate on Foreign exchange rate.

2 Literature review

Hacker et al. (2010) in their paper, The Relationship between Exchange Rates and
Interest Rate Differentials: a Wavelet Approach have analysed the relationship between
the two variable as the spot exchange rate and the interest rate differential for selected
seven countries, with a small country Sweden. They concluded that there tends to be an
adverse inter-relation between the spot exchange rate (domestic-currency price of foreign
currency) and the nominal interest rate differential (approximately the domestic interest
rate minus the foreign interest rate) for short time period, while a positive correlation was
established for long time period.
Bhat and Laskar (2016) have investigated in their research paper, Interest Rate,
Inflation Rate and Gross Domestic Product of India the impact of interest rate and
inflation rate on gross domestic product. They concluded that there was substantial
56 F.A. Salehbhai and P.P. Jariwala

positive correlation between GDP, interest rate and inflation rate and could together
define 32% variation in GDP during study period 1998 to 2012.
Furman and Stiglitz (1998) have analysed the effect of increase in interest rate,
inflation, and many non-monetary factors on exchange rate for nine developing countries
during 1992–1998. The result showed that the high interest rate was related with a
subsequent depreciation of nominal exchange rate but the effect was more pronounced in
low inflation country than in high inflation country.
Gould and Kamin’s (1999) project The Impact of Monetary Policy on Exchange Rates
during Financial Crises, they found that during financial crisis, movements in monetary
policy key rates and stock prices exert significant effect on exchange rates of selected
countries. They covered financial crisis period of Malaysia, Indonesia, Korea,
Philippines, Thailand and Mexico. They concluded that the monetary policy firmly does
have important impact on exchange rates. However the change in monetary policy took
place more slowly and over longer periods of time than the events examined in their
study.
Muchiri (2017) has found the effect of most important two macro-economic factors –
interest rate and inflation rate on Kenyan Shilling exchange rate in his project, Effect of
Inflation and Interest rates on Foreign exchange rate s in Kenya. The study covered
quarterly data of ten years from 2007 to 2016. He concluded that inflation rate has
positively significant impact on exchange rates while foreign direct investment has
negatively affected the foreign exchange rate s. He has also found that there is adverse
correlation between interest rate and Foreign exchange rate s in Kenya but the result is
insignificant. This study suggested that the Central Bank of Kenya and Government of
Kenya should maintain inflation rate by the tools of monetary policy.
Ali et al. (2015) analysed the effect of inflation, interest rates and supply of money on
fluctuation of exchange rate. They concluded that there was a long run correlation
between exchange rate volatility and inflation and an inverse change in rate of interest
increases inflation, leading to a change in volatility of exchange rate in same direction in
Pakistan.
However Hamid et al. (2017) explored the effect of interest rate, inflation and GDP
on the fluctuation in exchange rate of Pakistan and concluded that there was significant
correlation between interest rate, inflation rate and GDP with exchange rate of Pakistan.
Kearns and Manners (2006) explored the effect of monetary policy on the exchange
rate using an event study. They analysed intraday data of selected four countries namely
Australia, Canada, New Zealand, and the UK. The result highlighted that the effect of
monetary policy on exchange rate depended on expectation of future monetary policy and
if the expectations of future policy were satisfied, the exchange rate increased and vice
versa.
Saeidi and Valian (2011) analysed the correlation between the selected variables for
the economy of Iran as currency rates, interest rate and inflation for the time period from
1991–2009, by using econometric methods. The annual interest rate was split into three
parts as short term, midterm and long term and the exchange rates was apart into two
groups’ – official currency rates and nonofficial currency rates. They analysed
association between official and nonofficial currency with the interest rate. The results
concluded positive relationship between two selected variables.
Njoki (2017) has analysed interest rate, inflation rate, external debt and trade flow
affecting volatility of Foreign exchange rate in Kenya. The time period had been covered
from 1980–2016 for this research report titled, Factors that Influence Volatility in the
 An impact of bank rate and inflation rate on volatility 57

Foreign Exchange Rate in Kenya. It was concluded that interest rate, trade flow and
external debt revealed positive insignificant correlation with official foreign exchange
rate in Kenya while inflation rate had negative insignificant relationship with exchange
rate. In addition, all these factors had significant impact on Foreign exchange rate of
Kenya. According to Benidict (2013) there was a negative moderate relationship between
inflation rate and US DOLLAR exchange rate in Kenya during 2003 to 2013 described in
his research project.
Dash (2012) has studied the relationship between interest rate and exchange rate in
India during April 1993 to March 2003. The result shows that there was a long run
negative significant relationship between call money rate, net intervention rate and
exchange rate. It was concluded that if the value of exchange rate decreased, the
monetary authority of the economy have promoted to increase interest rate to stabilise the
value of rupee in forex market.
Kayhan et al. (2013) have examined the causal relationship between interest rates and
exchange rate in BRIC – T countries (Brazil, Russia, India, China and Turkey) using
secondary data obtained from International Financial Statistics database in their
manuscript titled, Interest Rates and Exchange Rate Relationship in BRIC – T Countries.
They found that exchange rate was affected by interest rate only in China and this effect
is found only in the long run and exchange rate shocked induces changes in interest rate
in the shorter period.

3 Research methodology

3.1 Objectives of the research

• To find out the correlation between bank rate and foreign exchange rate.
• To analyse the correlation between inflation rate and foreign exchange rate.
• To know the impact of bank rate on foreign exchange rate in short term.
• To find out the impact of inflation rate on foreign exchange rate.
• To know the compound effect of bank rate and interest rate on foreign exchange rate
in India.

3.2 Hypothesis
• H0: There is no association between bank rate and inflation rate with selected foreign
exchange rate (USD/INR).
H1: There is association between bank rate and inflation rate with selected foreign
exchange rate (USD/INR).
• H0: There is no significant effect of inflation rate on foreign exchange rate of
USD/INR.
H1: There is significant effect of inflation rate on foreign exchange rate of USD/INR.
58 F.A. Salehbhai and P.P. Jariwala

• H0: There is no significant effect of bank rate on foreign exchange rate of USD/INR.
H1: There is significant effect of bank rate on foreign exchange rate of USD/INR.
• H0: There is no significant compound effect of both yearly average variables on
yearly average USD/INR.
H1: There is significant compound effect of both yearly average variables on yearly
average USD/INR.

3.3 Data and methodology

The data used in the study is secondary and is collected from Bloomberg database; RBI
published reports, other websites and journals. The study period includes data from 1st
April 2009 to 31st Mar 2018, which covers nine years. The data of bank rate and
exchange rate of US DOLLAR/INR data is taken on the date of announcement of
monetary policy by RBI and yearly average data of inflation rate are taken to test the
effect of inflation rate on yearly average data of exchange rate – US DOLLAR/INR.

3.4 Analytical tools of the study

Descriptive analysis, correlation and regression model are used to analyse the data and to
test the selected hypothesis.

3.5 Limitation of the study

• The study is restricted to only two variables affecting foreign exchange rate of
USD/INR. Public debt of the country, stability of the current account, terms and
condition of the foreign trade are other factors which affect foreign exchange rate
too.
• In this study, the US DOLLAR versus INDIAN RUPEES is considered to measure
exchange rate, CPI is a measure of Inflation, bank rate as a measure of interest rate.
• The secondary data of the study are collected from RBI published report which is not
adjusted for this research.

3.6 Scope of the study

An additional research can be carried out on the association between bank rate, inflation
and Exchange rate among the other Asian countries. It recommends other
macro-economic variables as government policies, fiscal policy, GDP, FDI, etc. to check
the effect on foreign exchange rate in India. It suggests an additional research using
different exchange rate like EURO/INR, YEN/INR to measure the effect of bank rate and
inflation rate.
 An impact of bank rate and inflation rate on volatility 59

4 Data analysis and findings

During the selected research time period, on the date of declaration of monetary policy
bank rate and Return in USD/INR rate are shown in Table 1. Difference between opening
value of US DOLLAR/ INR and closing value of US DOLLAR/ INR is considered as
Return in foreign exchange rate. On the declaration of monetary policy, it is observed that
foreign exchange rate becomes more volatile. During the research time period, it is noted
that bank rate was unchanged at 6% up to 2012 and for the first time it was raised to 9%
in April 2012. It is noticed that bank rate was marginally increased as shown in Table 1
but there was no stability in Return in foreign exchange rate.
Table 1 Bank rate and return in USD/INR

Monetary policy declaration date Bank rate % Return in USD/INR rate

21-Apr-2009 6.00 0.08
28-Jul-2009 6.00 0.04
27-Oct-2009 6.00 0.30
29-Jan-2010 6.00 –0.15
19-Mar-2010 6.00 0.11
20-Apr-2010 6.00 –0.14
27-Jul-2010 6.00 –0.39
16-Sep-2010 6.00 0.00
02-Nov-2010 6.00 0.02
16-Dec-2010 6.00 0.05
25-Jan-2011 6.00 0.24
17-Mar-2011 6.00 0.07
03-May-2011 6.00 0.21
16-Jun-2011 6.00 0.24
26-Jul-2011 6.00 –0.17
16-Sep-2011 6.00 –0.14
25-Oct-2011 6.00 –0.24
16-Dec-2011 6.00 –1.15
24-Jan-2012 6.00 0.04
15-Mar-2012 6.00 0.37
17-Apr-2012 9.00 –0.29
18-Jun-2012 9.00 0.50
31-Jul-2012 9.00 –0.04
17-Sep-2012 9.00 0.12
30-Oct-2012 9.00 –0.12
18-Dec-2012 9.00 0.12
29-Jan-2013 8.75 –0.38
19-Mar-2013 8.75 0.43
Source: Monetary policy report and RBI websites
60 F.A. Salehbhai and P.P. Jariwala

Table 1 Bank rate and return in USD/INR (continued)

Monetary policy declaration date Bank rate % Return in USD/INR rate

03-May-2013 8.25 –0.02
17-Jun-2013 8.25 0.41
30-Jul-2013 10.25 1.31
20-Sep-2013 9.50 0.19
29-Oct-2013 8.75 –0.11
18-Dec-2013 8.75 0.19
28-Jan-2014 9.00 –0.62
01-Apr-2014 9.00 0.08
03-Jun-2014 9.00 0.26
05-Aug-2014 9.00 –0.04
30-Sep-2014 9.00 0.33
02-Dec-2014 9.00 –0.11
15-Jan-2015 9.00 0.18
03-Feb-2015 8.75 –0.13
04-Mar-2015 8.75 0.49
07-Apr-2015 8.50 0.09
02-Jun-2015 8.25 0.08
04-Aug-2015 8.25 –0.38
29-Sep-2015 7.75 –0.58
01-Dec-2015 7.75 –0.03
02-Feb-2016 7.75 0.16
05-Apr-2016 7.00 0.31
07-Jun-2016 7.00 –0.15
09-Aug-2016 7.00 –0.04
04-Oct-2016 6.75 0.12
07-Dec-2016 6.75 –0.30
08-Feb-2017 6.75 –0.34
06-Apr-2017 6.50 –0.44
07-Jun-2017 6.50 –0.08
02-Aug-2017 6.25 –0.49
04-Oct-2017 6.25 –0.32
06-Dec-2017 6.25 0.09
07-Feb-2018 6.25 0.06
Source: Monetary policy report and RBI websites
The yearly average rate of Inflation and yearly average rate of USD/INR during 2009 to
2017 are as under in Table 2. It is observed that yearly average rate of foreign exchange
rate is increased continuously whereas the yearly average inflation rate is differential
during study time period.
 An impact of bank rate and inflation rate on volatility 61

Table 2 Inflation rate and USD/INR

Year Yearly average inflation rate Yearly average rate of USD/INR

2009 10.83 48.368
2010 12.11 45.658
2011 8.87 46.459
2012 9.30 53.420
2013 10.92 58.512
2014 6.37 61.007
2015 5.88 64.120
2016 4.97 67.170
2017 2.49 65.100
Source: Official website of RBI

• H0: There is no association between bank rate and inflation rate with selected foreign
exchange rate (USD/INR).
H1: There is association between bank rate and inflation rate with selected foreign
exchange rate (USD/INR).
To find out the correlation between variable, Karl Pearson correlations techniques is
assigned for analysis. From Table 3 it is found that the correlation between bank rate and
return in USD/ INR is 0.283 which shows a mid-degree positive correlation. The
significance values of the two variables are 0.027 which is not more than 0.05. Hence
alternative hypothesis is to be accepted that there is significant association between bank
rate and US DOLLAR/INR.
Table 3 Correlations

BANK RATE RETURN IN US DOLLAR/INR

BANK RATE Pearson correlation 1 0.283*
Sig. (2-tailed) 0.027
N 61 61
RETURN IN US Pearson correlation 0.283* 1
DOLLAR/INR Sig. (2-tailed) 0.027
N 61 61
Note: *Significant at the 0.05 level (2-tailed).
Table 4 Correlations

AVERAGE INFLATION US DOLLAR / INR

AVERAGE Pearson correlation 1 –0.823**
INFLATION Sig. (2-tailed) 0.006
N 9 9
US DOLLAR/INR Pearson correlation –0.823** 1
Sig. (2-tailed) 0.006
N 9 9
Note: **Significant at the 0.01 level (2-tailed).
62 F.A. Salehbhai and P.P. Jariwala

Table 4 shows that the relationship between yearly average inflation rate and foreign
exchange rate of US DOLLAR/INR have highly negative correlation (–0.823) and the
significance value of the relationship is 0.006 which is not more than 0.05. Hence the null
hypothesis is to be rejected. There is significant correlation between average inflation rate
and average foreign exchange rate of USD/INR.
• H0: There is no significant effect of inflation rate on foreign exchange rate of
USD/INR.
H1: There is significant effect of inflation rate on foreign exchange rate of USD/INR.
To test the impact of yearly average inflation rate on yearly average foreign exchange
rate of US DOLLAR/INR, yearly average foreign exchange rate of US DOLLAR is taken
as the dependent variable while the yearly average inflation rate is considered as
independent variable for regression analysis. Linear regression model is fitted at 99% as
the significance value of F-test is less than 0.01 as per Table 5.
Table 5 ANOVAa

Model Sum of squares Df Mean square F Sig.

1 Regression 382.127 1 382.127 14.705 0.006b
Residual 181.902 7 25.986
Total 564.029 8
Notes: aDependent variable: YEARLY AVERAGE US DOLLAR/INR.
bPredictors: (constant), AVERAGE INFLATION.
It is observed from Table 6 that the explanatory variables, taken together establish a
relationship nearly 67.7% as the coefficient of determination R2 is 0.677. This implies
that the changes that have taken place in the yearly foreign exchange rate, due to yearly
inflation rate is 67.7%. Hence, there are other macro-economic factors which are
responsible for changes in yearly average rate of foreign exchange rate.
Table 6 Model summary

Model R R square Adjusted R square Std. error of the estimate

1 0.823a 0.677 0.631 5.097646
Note: aPredictors: (constant), AVERAGE INFLATION.
Table 7 Coefficients

Unstandardised Standardised
Model coefficients coefficients T Sig.
B Std. error Beta
1 (Constant) 73.795 4.784 15.425 0.000
AVERAGE –2.151 0.561 –0.823 –3.835 0.006
INFLATION
Note: aDependent Variable: US DOLLAR/INR.
The regression equation Y(foreign exchange rate)= α + β (inflation rate) + € shows that
for every unit change in β there is –2.151 unit change in Y. the value of α is 73.795
which shows that the other actors are less responsible for this negative relationship. As
 An impact of bank rate and inflation rate on volatility 63

per Table 7 the t-value is –3.835 and significant value is 0.006 which is not more than
0.05, therefore the alternative hypothesis is accepted and null hypothesis is rejected.
Hence, there is adverse significant effect of yearly average inflation rate on yearly
average foreign exchange rate of US DOLLAR/INR.
• H0:- There is no significant effect of bank rate on foreign exchange rate of USD/INR.
H1:- There is significant effect of bank rate on foreign exchange rate of USD/INR.
To test the effect of bank rate on return in foreign exchange rate of USD/INR, return in
foreign exchange rate of US DOLLAR/INR is taken as the dependent variable while the
bank rate is considered as independent variable for Regression analysis. Linear regression
model is fitted at 95% as the significance value of F-test is less than 0.05 as per Table 8.
Table 8 ANOVAa

Model Sum of squares Df Mean square F Sig.

1 Regression 0.560 1 0.560 5.150 0.027b
Residual 6.416 59 0.109
Total 6.976 60
Notes: aDependent Variable: US DOLLAR/INR. bPredictors: (Constant), bank rate.
It is observed from Table 9 that the explanatory variables, taken together establish a
relationship nearly 8.0% as the coefficient of determination R2 is 0.080 of the total
variables in the foreign exchange rate of US DOLLAR/INR. It implies that the changes
that have taken place in foreign exchange rate on the day of bank rate declaration due to
the bank rate is only 8%. Hence, there are other macro-economic factors which are
responsible for foreign exchange rate on that day.
Table 9 Model summary

Model R R square Adjusted R square Std. error of the estimate

1 0.283a 0.080 0.065 0.32976
Note: aPredictors: (constant), BANK RATE.
The regression equation Y(foreign exchange rate)= α + β (bank rate) + € shows that for
every unit change in β there is 0.072 unit change in Y. the value of α is –0.534 which
shows that the other factors are more responsible for this relationship. As per Table 10
the t-value is 2.269 and significant value is 0.027 which is less than 0.05, therefore the
alternative hypothesis is accepted and null hypothesis is rejected. Hence, there is
significant impact of bank rate on foreign exchange rate of USD/INR.
Table 10 Coefficients

Unstandardised Standardised
Model coefficients coefficients T Sig.
B Std. error Beta
1 (Constant) –0.534 0.238 –.240 0.029
BANK RATE 0.072 0.032 0.283 2.269 0.027
Note: aDependent variable: US DOLLAR/INR.
64 F.A. Salehbhai and P.P. Jariwala

• H0: There is no significant compound effect of both yearly average variables on

yearly average USD/INR.
H1: There is significant compound effect of both yearly average variables on yearly
average USD/INR.
To test the compound impact of yearly average inflation rate and yearly average bank rate
on yearly average foreign exchange rate of US DOLLAR/INR, foreign exchange rate of
USD/INR is taken as the dependent variable while both the variables are considered as
independent variables for Regression analysis. Linear regression model is fitted at 99% as
the significance value of F-test is less than 0.01 as per Table 11.
Table 11 ANOVAa

Model Sum of squares Df Mean square F Sig.

1 Regression 482.842 2 241.421 17.842 0.003b
Residual 81.187 6 13.531
Total 564.029 8
Notes: aDependent
variable: USDOLLAR/INR. bPredictors: (constant), AVERAGE
INTEREST RATE, AVERAGE INFLATION RATE.
It is observed from Table 12 that the explanatory variables, taken together establish a
relationship nearly 85.6% as the coefficient of determination R2 is 0.856. This implies
that the changes that have taken place in the yearly foreign exchange rate, due to both
yearly average rates is 85.6%. Hence, there are other macro-economic factors which are
responsible for changes in yearly average rate of foreign exchange rate.
Table 12 Model summary

Model R R square Adjusted R square Std. error of the estimate

1 0.925a 0.856 0.808 3.678466
Note: aPredictors: (constant), AVERAGE INTEREST RATE, AVERAGE INFLATION
RATE.
Table 13 Coefficientsa

Unstandardised Standardised
Model coefficients coefficients T Sig.
B Std. error Beta
1 (Constant) 53.508 8.198 6.527 0.001
AVERAGE –2.061 0.406 –0.788 –5.074 0.002
INFLATION
AVERAGE INTEREST 2.658 0.974 0.424 2.728 0.034
RATE
Note: aDependent Variable: USDOLLAR/INR.
The regression equation Y(foreign exchange rate)= α + β (yearly average bank rate and
inflation rate) + € shows that for every unit change in β there is –2.061 and 2.658 unit
change in Y respectively. The value of α is 53.508 which shows that the other factors are
also responsible for this relationship. As per table 13 the constant t-value is 6.527 and
significant value is 0.001 which is not more than 0.05, therefore the alternative
 An impact of bank rate and inflation rate on volatility 65

hypothesis is accepted and null hypothesis is rejected. Hence, there is significant

compound effect of both yearly average variables on foreign exchange rate of US
DOLLAR/INR.

5 Conclusions and suggestions

As the foreign exchange rate is one of the most important determinants of a country’s
relative level of economic health, it is among the most watched, analysed and
governmentally manipulated economic measures. bank rate and inflation rate are
influenced factors of foreign exchange rate. Linear regression techniques and Karl
Pearson correlation methods are used to determine the relationship and impact of both
factors on foreign exchange rate.
The results and findings reveal that there exists a positive relationship of (0.283) of
foreign exchange rate (USD/INR) with bank rate and both the rates move in same
direction. As bank rate increases foreign exchange rate increases and vice versa. It is
found that there is strong negative relationship (–0.823) between yearly average inflation
rate of India with yearly average rate of Foreign Exchange. It implies that foreign
exchange rate and inflation moves in opposite direction and hence inflation increases
foreign exchange rate decreases. It is found that the impact of yearly inflation rate on
USD/INR was to the extent of 67.7% during study period. Hence, other macro-economic
factors also influence foreign exchange rate. However short term impact of unit of bank
rate on foreign exchange rate is nearly 8.0% as co efficient of determination R2 is 0.08
during study period. Therefore other major factors also affect the fluctuation in foreign
exchange rate. The compound effect of both yearly average variables on yearly average
foreign exchange rate of USD/INR is nearly 85.6%. Hence, other macro-economic
factors also influenced yearly average rate of foreign exchange rate. The overall multiple
regression models for foreign exchange rate, bank rate and inflation rate is significant
with individual parameters.
As the exchange rates play an important role in economics, affecting the balance of
trade between nations, influencing foreign tourism industry and influencing investment
strategy, it should be stabilised. As per the current government policy, tourism industry is
developing industry. So to attract tourist, foreign exchange rate should be regulated by
Government at attractive rate. To attract FIIs and multinational companies, it is
recommended that Government of India with the Reserve Bank of India should frame and
pursue efficient monetary policies that will help in reducing and stabilising both unit of
bank rate and inflation rate stabilised foreign exchange rate (USD/INR) in the world
market and an increase in the value of Indian Rupees is directly necessary to enhance the
economic growth of India.

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