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Theoretical and Applied Economics
No. 4 / 2020 (625), Winter

Monetary policy and exchange rate pass-through in India

Bhavish SHARMA
Narsee Monjee Institute of Management Studies (NMIMS), Bengaluru, India

Abstract. The paper tests the causality between monetary policy and exchange rate based on data from 1991 onwards as that was when India opened up the economy. According to theory, interest rates are inversely related to exchange rates with the main linkage between them being capital flows. External debt also has considerable effects. The paper uses trend-line and regression analysis to test the impact of various regressors on the dependent variable exchange rate. The paper finds that the monetary policy is not as effective as theory would suggest in its ability to control the exchange rate and that the pass-through from repo rate to exchange rate is not complete. The paper provides suggestions for improving the linkage or pass-through as well as suggest usage of other policies in tandem with monetary policy of RBI for India to achieve the economic objectives for long-term growth as well as tackling potential short-term crises.

Keywords: monetary policy, exchange rate, capital, interest rate.

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