The Structural Metamorphosis of USD-INR Fluctuations (2006–2026): An Empirical Investigation of Macroeconomic Determinants Using ARDL and VAR Frameworks

Abstract

The USD–INR exchange rate in India from (2006–2026), focusing on the shift from domestic inflation-driven dynamics to increasing sensitivity to external sector risks and global capital flow movements. This study investigates the macroeconomic determinants of the USD-INR exchange rate fluctuations over a twenty-year period (2006–2026), tracking India’s transition from internal inflationary volatility to external sector vulnerability. Utilizing ARDL and VAR methodologies to analyze a dataset encompassing Crude Oil, Gold Prices, CPI Inflation, and Interest Rate Differentials, the empirical results reveal that the Trade Deficit (r = 0.87) and Gold Prices (r= 0.86) are the most dominant structural drivers of Rupee depreciation. Notably, while India successfully anchored domestic inflation—reducing CPI from 11.99% in 2010 to 3.21% in 2026—the currency remains highly sensitive to the narrowing interest rate gap between India and the US (β = 3.429), which triggered a record $115.1 billion capital outflow in early 2026. The findings conclude that the Rupee's stability is now dictated more by global "risk-off" sentiments and safe-haven asset demand than by domestic price growth. The study recommends a policy shift toward Gold import rationalization and the maintenance of a strategic interest rate buffer to insulate the economy from global monetary tightening and sudden capital flight.