The exchange rate is considered to be an important macroeconomic variable in determining a country’s economic stability. Moving from fixed to flexible exchange rate in the early 1970s, researchers and policy makers have shown great interest in studying exchange rate volatility and its impact on macroeconomic variables. Many economists argued for the establishment of flexible exchange rate regime on two grounds. The first argument is related to the competitive position of a country in the international market. The second argument is that the stabilizing behavior of speculators will make exchange rates relatively stable. The recent global financial crisis, debt crisis, etc. have increased the exchange rate volatility. Since then, numerous studies have been exploring these impacts, but their findings are mixed and depend on the region and the period under estimation as well as data and methodology used. The excessive exchange rate fluctuation has detrimental impact on a country’s economic growth. In the globalized world, international trade and investment decisions have become more difficult due to high risk resulting from exchange rate volatility.
India has initiated a series of structural reforms in the foreign exchange market since the 1990s. These reforms are meant to gain investors’ confidence and boost domestic competitiveness. However, reforms have paved the way for exchange rate volatility, influenced the macroeconomic fundamentals, and acted as hurdles for India’s economic growth.
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