Impact assessment of changes in balance of payment on foreign exchange rates: an usd/ inr benchmark

Author: 
Sandeep Nath Modi and Sameer Kumar

Foreign Exchange Rates is very important economic indicator for the Government and Central Bank of any country which shows the utility of the particular country’s currency against the foreign currency and having an international importance of domestic economic viability. While Balance of Payment is the benchmark for economic relationship with various countries. Balance of Payments and Foreign Exchange Rates are directly economically correlated because Balance of Payments are settled in foreign exchanges which requires exchanges rates for the settlement of the transaction between two countries. This paper deals with four aspects, (i) to study the impact of changes in USD/INR on the basis of changes in Balance of Payment of India from 1970 to 2016, (ii) to analyse component(s) in respect to Current Account and Capital Account which affect the USD/INR, (iii) to examine effect of Free Float and Managed Float Regime on Exchange rate Movements and (iv) to find out relationship between Trade Deficit and USD/ INR. Findings suggest that there is a positive relationship between changes in Balance of Payment on USD/INR in both Pre-Liberalisation Era and Post-Liberalisation Era in the Indian Economy. An appreciation in Indian currency has a positive impact on reducing Trade Deficit hence positive impact on Balance of Payment. The Study reveals that there is a negative correlation between the Current Account / Capital Account under Balance of Payment with USD in comparison to INR.

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