Impact of Inflation on the Exchange Rate and External Debt of India

Abstract

India is one of the few emerging economies that is proliferating. India is facing inflation due to geopolitical issues, and the war between Russia and Ukraine. This has led to cost-push inflation due to disruption in the supply. It is evident that external debt and exchange rates depict a country’s economic development status. The aim of this study is to understand India’s external debt, exchange rate, and inflationary trend and analyse the impact of inflation on both indicators. The current study is based on an extensive literature review and secondary data analysis on inflation, exchange rate, and external debt from different published reports. To understand the trend of inflation, exchange rate, and external debt, a trend analysis has been done. Further to measure the impact of inflation and exchange rate a correlation test has been performed. The result of the correlation test inflation rate and external debt are strongly positively correlated. A one-unit increase in the inflation rate would increase the external debt by 0.84. Further, the correlation results between the inflation rate and exchange rate show a moderately negative correlation at -0.58. The association between public debt and inflation is important to measure the inflationary trend of an economy.