Real Exchange Rate Variations in India in the Liberalized Regime: Implicating the Role of Openness, Trade Balance, and Money Supply

This article examines the dynamics of the real exchange rate in India under the market-based exchange rate management regime from 1996Q1 to 2024Q1. It moderates the role of openness, trade balance, money supply, and inflation rate differential in the real exchange rate variations. The results reveal that the real effective exchange rate (RER) and variations in the rupee/dollar real rate (RS) are associated with several specifications of trade openness, trade balance, export and import penetrations, money supply, and the inflation rate differential between India and its major trading partners. Trade openness, trade balance, and export penetration lead to the appreciation of RERs and RS. Besides, a significant depreciating effect of the domestic money supply on the RS is observed. However, it does not seem to affect the RER. The impact of the inflation rate differential between India and its major trading partners is ambiguous. The findings underscore the pivotal role of external sector management in monitoring exchange rates in India. JEL Classification F31, F14, F41, C32