Exploring the Dynamics of Exchange Rates: An Empirical Analysis and Predictive Modelling

In India, globalization and reforms in the financial sector have brought about a major overhaul of the financial landscape. The connection between financial markets and the tangible economy is now highly valued in the current scenario. Exchange rate affects a country's economy in several ways. It has a huge effect on international trade, economic growth, capital flows, interest rates and also inflation. Here, the aim is to understand the underlying factors that affects the exchange rate of US dollar with respect to Indian rupee. To accomplish this, a Vector Auto Regression (VAR) model, as well as other machine learning techniques such as multi-variable linear regression, polynomial regression, and regression tree, are employed to forecast exchange rates. Our findings indicate that Trade Balance is a significant factor which cause fluctuations in exchange rate of USD and regression tree model performs better from the side of all machine learning model applied for predicting the same.