Exchange Rate Volatility and Stock Market Performance:Evidence from India
Keywords:
Exchange Rate Volatility, Stock Market Performance, NIFTY 50, Macroeconomic Variable, India.Abstract
This study examines the relationship between exchange rate volatility and stock market performance in India during the period 2020-2025. The primary objective of our study is to examine the contemporaneous and one-period-lagged
effects on stock market performance in India by assessing the individual and collective effects of macroeconomic variables such as the inflation rate and the repo rate. During the period 2020-2025, a total of 67 observations were considered for all the variables. To estimate the exchange rate volatility, the annualized standard deviation of the logarithmic returns of the INR/USD exchange rate. Two multiple linear regression models were estimated using Ordinary Least Squares (OLS). Model 01 is estimated to study contemporaneous impact, and Model 02 is estimated to study the one-period lagged effect on the stock market performance. The study found that the model is robust and statistically significant (????(3,63) = 30.5,???? < .00), explaining 59.3% of the variance (????2 = 0.593). Correlation analysis reveals a significant negative relationship between exchange rate volatility and stock market performance (r =-0.256, p = 0.036). However, the multiple regression results indicate that exchange rate volatility is not statistically significant in Model 01 (???? = −21807,???? = 0.319) and Model 02 (???? = −24609, ???? = 0.253) when macroeconomic variables such as the inflation rate and the repo rate are included. In contrast, the inflation rate confirms a strong negative impact (p < .001), while the repo rate shows a significant positive impact (???? < .001) on NIFTY 50 index returns. Diagnostic tests confirm the absence of multicollinearity (???????????? < 1.10) and satisfy the normality assumptions. The study findings suggest that domestic macroeconomic variables obscure the effects
of exchange rate volatility, indicating that the inflation rate and repo rate are more critical determinants of Indian stock market performance than currency fluctuations during the period.
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