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Abstract:
The foreign capital inflow into India has been associated with rising Gross Domestic Product (GDP). The main focus of the
paper lies in analyzing the correlation of macroeconomic indicators in relation to the inflows of foreign capital and exchange
rates & GDP in India since January 2010 to May 2012. The overall focus of the paper is on other macroeconomic indicators
also like inflation & FDI. The correlation analysis of selected indicators shows that GDP is negatively related to the exchange
rates of Indian rupee per unit of US dollar. This suggests that the prevailing exchange rates not helping in the growth of Indian
GDP. It also focuses on the steps taken by Finance Minister like austerity. This paper also entails on the current scenario of
the market.

Key Words: Exchange Rate, GDP, FDI, Austerity.

1. Introduction:
In India it was year 1991 in which several major Economic reform programs were initiated. With the liberalization &
globalization, there was increase in trade flows & capital inflows. In fact, capital inflows significantly influence the
exchange rates and the economy. In the 1990s, the capital inflows into developing economies had increased rapidly and
these inflows were due to FDI in the economy.
Capital inflows into any developing country are considered as the main engine of economic growth. In India, during the
financial year 2005-06, Foreign Direct Investment (FDI) inflows were US $ 8.9 bn & in 2006-07 it was US $ 15.7 bn
(UNCTAD, 2007). During the financial year 2007-08, Foreign Direct Investment (FDI) inflows were US $ 24.5 bn
which increased further in April-February 2009-10, the country's FDI stood at US $ 24.62 billion then.
But in 2010-11 it fell down at $ 19.4 billion. In 2008-09 and 2009-10, India's GDP grew 6.8 % and 8 %, respectively.
During these periods, most of the western economies had registered a dismal growth.
Terms of trade or TOT is (Price of exportable goods) / (Price of importable goods). In general, it means the quantity of
imports can be purchased through the sale of a fixed quantity of exports. The terms of trade is influenced by the
exchange rate because a rise in the value of a country's currency lowers the domestic prices for its imports but does not
directly affect the commodities it produces (i.e. its exports).
Global slowdown due to unfolding of euro zone sovereign debt crisis has, inter-alia, impacted the Indian economy
through deceleration in exports, widening of trade and current account deficit, decline in capital flows, fall in the value
of Indian Rupee, stock market decline and lower economic growth.
Objectives:
To examine the variations in exchange rate of the Indian rupee in exchange of USD specifically in 2010, 2011 &
2012.
To evaluate the effects of the macroeconomic indicators on the exchange rate of India.
Hypothesis:
H
0
: There is no direct relation in exchange rate & GDP growth rate since 2010
H
1
: There is direct relation in exchange rate & GDP growth rate since 2010.

Research Methodology
Data Source:
For the present study, the data have been collected from Economic Survey, Handbook of Statistics on Indian Economy
of the RBI, and Report on Currency and Finance of the RBI. RBI and Economic Survey are the main sources of
information on the foreign capital inflows and exchange rate in India, which provide data at international and national
ECONOMIC GROWTH IN INDIA & FLUCTUATIONS IN
EXCHANGE RATE
A CASE STUDY: TERMS OF TRADE OF INDIA SINCE 2010

Deepali Garge

Asst Prof, Dr. D. Y. Patil University, Dept of Business Mgt,
CBD Belapur, Navi Mumbai
IPASJ International Journal of Management (IIJM)
Web Site: http://www.ipasj.org/IIJM/IIJM.htm
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levels. In this study the quarter wise data for GDP growth rate and Exchange Rate has been taken from the Third
quarter of Year 2010 to first quarter of year 2012.

Model Specification:
The Correlation Coefficient technique has been used to study the correlation between GDP growth rate and exchange
rate. The expression for Karl Pearsons Correlation Coefficient is given by the following formula.

where,
r
xy
is the Pearsons correlation coefficient;
X are data points of GDP growth rate;
Y are data points of Exchange rate;
n
x
are number of data points of X;
n
y
are number of data points of Y.
The main finding of this study is as follows:
Variations in Exchange Rate:
Some important changes have been observed in the exchange rate since 1991. A significant downward adjustment in
the exchange rate took place in 1991. The exchange rate of Indian rupee per unit of US dollar has increased from Rs.
17.94 in 1990-91 to Rs. 40.24 in 2007-08. But there are major changes observed in these days. In 2010 to 2012 there
were too many ups & downs in exchange rate because of which Indias Terms of Trade were unfavorable & ultimately
GDP growth rate shrink. In 2010 when GDP growth rate was 9.4% & USDINR rate was 46.44 there was continuous
fall in GDP growth rate and rise in exchange rate in Rupee for 1 USD. In 1
st
quarter 2012 GDP growth rate was
observed was 6.1% & exchange rate was 52.18 rupees in exchange with $.
Analysis of Study:
Analysis of the above data shows that there is negative correlation between Growth rate of GDP & exchange rate of $ to
Re. Correlation coefficient value r
xy
obtained is -0.68 which indicates that there is a Strong Negative Correlation
between the two parameters. Hence, the null hypothesis (H
0
) is rejected.
The coefficient of determination, r
2
gives the proportion of the variance (fluctuation) of one variable that is predictable
from the other variable. It is a measure that allows us to determine how certain one can be in making predictions from a
certain model/graph.
The coefficient of determination is the ratio of the explained variation to the total
variation. Here r is -0.68 so r
2
= 0.46 which means that 46% of the total variation in y can be explained by the (inverse)
linear relationship between % GDP growth rate and Exchange Rate (as described by the regression equation).


Fig: 1: Relation of GDP & Exchange Rate

In the above figure, it is observed that there is negative relationship between Growth rate of GDP and Exchange rate of
US $ & Rs. This study has considered last 2 quarters of financial year 2009-10 to last quarter of 2011-12.
IPASJ International Journal of Management (IIJM)
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In the above figure we have considered only 7 quarters from 2010 to 2012. It has been observed after the analysis of this
data that there is negative correlation between Growth rate of GDP & Exchange rate of US $ & Rs.
The latest information on this topic is also included in this paper. There were too many fluctuations in the month of
May 2012. In last 15 days of the month of May12, the exchange rate gone upto 56.3 Rs in exchange of $ from 53.68
Rs.

Reasons of volatility in Exchange Rate in 2011-12:
Global slowdown due to unfolding of euro zone sovereign debt crisis has, inter-alia, impacted the Indian economy
through deceleration in exports, widening of trade and current account deficit, decline in capital flows, fall in the value
of Indian Rupee, stock market decline and lower economic growth, current account deficit.
First Reason- $ in D:
India is an emerging economy. So, a huge percentage of investment in India is from outside the country, especially
from the US but due to recession in US, big institutions are collapsing and many of them are on the verge of
breakdown. They are suffering huge losses in their country. They have to maintain their balance sheets and look strong
on all statements, so to recover losses in their country, they are pulling out their investments from India. Due to this
pulling out of investment by these big companies from India or in other terms disinvestment, demand of dollar is rising
up and rupee is depreciating.
Second Reason: Negative Terms of Trade:
An observation in terms of international trade, commodity prices are crashing at international level.
Importers are trying to accumulate dollars, as they have to pay in terms of dollars and at the end demand of $ is
increasing against the rupee. This has not happened yet due to lack of confidence in all kind of markets.
Exporters have a very few orders from outside countries, so there is no matter of converting dollar into rupee thereby
decreasing demand for rupee.
Besides the above-mentioned two reasons, there are many other reasons, which I would like share in the comments
section below with you and others.
Now, US $ is at 55.32 and expected to appreciate further due to huge inflows. The major gainers are Indian IT
companies including BPOs, call center outsourcing.
A slight modification in fig.1 shows the correlation between the GDP growth rate and Exchange rate.


Fig 2: Modified figure of Correlation between Exchange rate & GDP rate

Measures initiated by the RBI:
Reserve Bank of India (RBI) intervenes by selling dollars in the forex market. Government is taking steps to arrest
volatility in the foreign exchange market. In 2009, measures on inflation were mainly with monetary policy. Among
those measures increase in statutory liquidity ratio (SLR) by RBI from 24% to 25%.
IPASJ International Journal of Management (IIJM)
Web Site: http://www.ipasj.org/IIJM/IIJM.htm
A Publisher for Research Motivation........ Email: editoriijm@ipasj.org
Volume 2, Issue 3, March 2014 ISSN 2321-645X

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Conclusion:
The exchange rate is dynamic variable. Because of exchange rate, other factors get influenced i.e. GDP and Terms of
Trade (TOT). The foreign exchange policy is in important part in the framework of Macroeconomic Stabilization. In
practice, the connection between these variables and interdependence must be taken into consideration because; it leads
to Currency appreciation and depreciation. Pearsons Correlation coefficient was calculated to be -0.68 showed strongly
negative (inverse) correlation between the exchange rate of USDINR, and GDP growth rate.
In this context, the RBI should create a balance to ensure disinflation by targeting a real appreciation of the currency
and favorable Terms of Trade (with external competitiveness). This could also affect the confidence of FDI.

Reference:
[1] Rajiv Kumar Bhatt (2011) International Journal of Trade, Economics and Finance, Vol. 2, No. 3, June 2011.
[2] Finance Minister of India blamed in his speech in Rajyasabha that Rupee's free fall: because of eurozone crisis.
Times of India, 22 May 2012.
[3] Amaresh Samantaraya, 2009, An Empirical Analysis of Exchange Rate Pass-Through in India: Relevance for
Inflation Management The IUP Journal of Monetary Economics, Vol. VII, No. 2, 2009, pp 1-16.
[4] FM says austerity steps soon to cut government spending Hindustan Times, 17
th
May, 2012 pp 1.
[5] Determinants of foreign direct investment in India by Monica Singhania and Akshay Gupta (2011), Journal of
International Trade Law and Policy, Vol. 10 No. 1, 2011pp. 64-82. Emerald Group Publishing Limited.