Determinants of the Indian Rupee–US Dollar Exchange Rate: A Regression Analysis of Macroeconomic Fundamentals, 2000–2025

Volume 11, Issue 2, 2026

International Journal of Commerce and Management Studies, ISSN 2456-3684

Paper Title

Author Name and Affiliation

Dr. Adil Jiwani

Assistant Professor, Department of Management Studies, Nabira Mahavidyalaya, Katol – 441302, Maharashtra, India, Emailid: adilajiwani@gmail.com

Abstract

This study examines the macroeconomic factors affecting the Indian Rupee vs US Dollar exchange rates over 2000–2025 using annual data. Influenced by purchasing power parity, uncovered interest rate parity, and the reserve-adequacy channel documented in the exchange-rate literature, four parameters are shortlisted: the India–US inflation differential, the India–US policy interest-rate differential, Brent crude oil prices, and India’s foreign exchange reserves. As these series are non-stationary and not cointegrated, confirmed by Augmented Dickey–Fuller, KPSS, and Engle–Granger tests, a levels regression is rejected as spurious. The relationship is instead estimated using annual changes. The resulting model explains 55.1% of year-on-year exchange-rate variation (adjusted R² = 0.461, F = 6.13, p = 0.002) and passes all standard diagnostic checks. Changes in reserves and oil prices are significant predictors of rupee movements, while changes in inflation and interest-rate differentials are the kind of slow-burn relationships that a short annual dataset is not well equipped to catch. A simple levels regression on the same data produced a higher but spurious R² of 0.80, with an economically uninterpretable coefficient on reserves.

Keywords

exchange rate determination; cointegration; spurious regression; interest rate parity; purchasing power parity; foreign exchange reserves

References

Bal, D. P., & Rath, B. N. (2015). Nonlinear causality between crude oil price and exchange rate: A comparative study of China and India. Energy Economics, 51, 149–156. https://doi.org/10.1016/j.eneco.2015.06.013
Coakley, J., Flood, R., Fuertes, A.-M., & Taylor, M. P. (2005). Purchasing power parity and the theory of general relativity: The first tests. Journal of International Money and Finance, 24(2), 293–316. https://doi.org/10.1016/j.jimonfin.2004.12.008
De Vita, G., & Trachanas, E. (2016). ‘Nonlinear causality between crude oil price and exchange rate…’ — A failed replication. Energy Economics, 56, 150–160. https://doi.org/10.1016/j.eneco.2016.03.014
Dua, P., & Pandit, B. L. (2002). Interest rate determination in India: Domestic and external factors. Journal of Policy Modeling, 24(9), 853–875. https://doi.org/10.1016/S0161-8938(02)00172-2
Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251–276. https://doi.org/10.2307/1913236
Francis, B. B., Hasan, I., & Hunter, D. M. (2002). Emerging market liberalization and the impact on uncovered interest rate parity. Journal of International Money and Finance, 21(6), 931–956. https://doi.org/10.1016/S0261-5606(02)00029-3
Ghosh, S. (2011). Examining crude oil price–exchange rate nexus for India during the period of extreme oil price volatility. Applied Energy, 88(5), 1886–1889.
Goyal, A., & Sethi, M. (2021). Exchange rate volatility and capital flows: Evidence from India. Economic Modelling, 98, 416–425. https://doi.org/10.1016/j.econmod.2020.09.018
Granger, C. W. J., & Newbold, P. (1974). Spurious regressions in econometrics. Journal of Econometrics, 2(2), 111–120. https://doi.org/10.1016/0304-4076(74)90034-7
Lothian, J. R. (2016). Purchasing power parity and the behavior of prices and nominal exchange rates across exchange-rate regimes. Journal of International Money and Finance, 69, 5–21. https://doi.org/10.1016/j.jimonfin.2016.06.015
MacKinnon, J. G. (2010). Critical values for cointegration tests (Queen’s Economics Department Working Paper No. 1227).
Reboredo, J. C. (2012). Modelling oil price and exchange rate co-movements. Journal of Policy Modeling, 34(3), 419–440.
Reserve Bank of India. (2025). Database on Indian Economy (DBIE): Weekly Statistical Supplement. Mumbai: RBI.
Rogoff, K. (1996). The purchasing power parity puzzle. Journal of Economic Literature, 34(2), 647–668.
Tiwari, A. K., Dar, A. B., & Bhanja, N. (2013). Oil price and exchange rates: A wavelet based analysis for India. Economic Modelling, 31, 414–422. https://doi.org/10.1016/j.econmod.2012.11.043
World Bank. (2026). World Development Indicators: Inflation, consumer prices (annual %) — India.
World Bank. (2026). Commodity Markets (‘Pink Sheet’): Crude oil (Brent), annual average prices.
Yildirim, Z. (2016). Global financial conditions and asset markets: Evidence from fragile emerging economies. Economic Modelling, 57, 208–220. https://doi.org/10.1016/j.econmod.2016.04.018

DOI

DOI: https://doi.org/10.67061/ijcams.2026.vol.11.issue.02.8086

Download PDF