The correlation between inflation and exchange rate in India

Abstract

The economic variables are integrated with each other like a complex mesh affecting one another with an unknown complex algorithm. It is a very tedious process and requires large skills and experience to establish the relationships among the plethora of economic variables in order to interpret the picture of the economy comprehensively. All the economic variables interact jointly to form the basis of understanding the economic algorithm. In contemporary ages, there has been a special interest in the inter-relationship between the exchange rates and inflation in both the advanced as well as the developing countries. These variables play a vital role in predicting the quantum of the development in the nominal and real sides of the economy, including the behaviour of domestic inflation, real output, exports and imports. The primary objective of this study is to establish the strength of correlation between the exchange rates and inflation in India over a period of time.