Macroeconomic fundamentals and exchange rate dynamics in India: Some survey results

Abstract

The present study examines the relevance of macroeconomic models in exchange rate determination in India. For this, the study has undertaken a primary survey, with the help of structured mailed questionnaire, on the Indian foreign exchange dealers to understand the dynamics of the market. The sample of the study is 91 dealers (24% of the total dealers). The findings from the primary survey is that majority of the dealers feel in the short and medium term, the changes in exchange rate is not influenced by the changes in macro fundamentals, rather is basically influenced by the micro variables like order flow, market movement, speculation, Central Bank intervention etc.. But in the long run, still it is the macro fundamentals that determines the exchange rates. Another interesting finding of this study is that the dealers feel speculation would increase volatility, liquidity and efficiency in the market and on the other hand, central bank intervention reduces volatility and market efficiency.