A Causality Study on the Volatility of Macroeconomic Fundamentals and Real Exchange Rate Volatility in India

This paper attempts to study the causality between the volatility of macroeconomic fundamentals on the volatility of real exchange rate of the Indian rupee for the period 1996–97 to 2015–16. The conditional variances of the variables are used as proxies for the measurement of volatility. Granger Causality Test is used to analyse the causal relationship between the variables. The results of the analysis indicate the presence of causality between macroeconomic fundamentals and real exchange rate behaviour. Further, the results of the causality test on the volatility variables establish the existence of causal relationship between not only the macroeconomic fundamentals and real exchange rate, but also between their volatilities.