Relationship Between Real Exchange Rate and Economic Growth in India

This article studies a near relationship between the real exchange rate and economic growth in India, for the period from Q1 2005 to Q4 2017, by considering the variables such as Nominal Exchange Rate, Consumer Price Index, Balance of Payments, Exports, Foreign Exchange Reserves, Gross Domestic Product, Imports, Inflation, International Reserves and Money Supply. This study used the Johansen cointegration test, Granger Causality and ADF stationary tests, for the purpose of analysis. The study found that Real Exchange Rate did have a linear relationship with all the variables of Economic Growth, except Balance of Payments and Inflation. Granger Causality Test revealed that the Real Exchange Rate recorded unidirectional relationship with Exports, Foreign Exchange Reserves and Money Supply. There was long-run relationship between Real Exchange Rate and Economic Growth. Hence, the policy makers in India should pay special attention to these variables, in order to devise appropriate policy, for the economic growth of India in the long run