The foreign exchange rate is considered to be an excellent indicator of an economy's competitiveness for global trade. Exchange rate volatility is one important component escalating the risks related to the financial markets. When currency rates fluctuate excessively, it has a negative impact on foreign trade and investments. The current study has made an effort to identify the various macroeconomic variables that influenced India's nominal exchange rate from 1991 to 2021 with the help of time series analysis. Augmented – Dickey Fuller test is used to test the stationarity of the variables. Johansen’s Cointegration test and Vector Error Correction model are used to study the long and short-run relationship between the variables. The results suggested that in the short run all the variables except inflation rate have a significant impact on the nominal exchange rate of India. In the long run, the coefficient of GDP and Trade openness are negative which implies that a 1 per cent increase in GDP and trade openness will lead to appreciation of the Indian Rupees. The coefficient of INF and TR are positive which implies that a 1 per cent increase in INF and TR will lead to depreciation of the Indian Rupees. Variance Decomposition analysis results indicated total foreign exchange reserves and GDP have strong influence on the exchange rate of India as compared to inflation and trade openness.

Keywords: Nominal Exchange Rate, VECM, Johansen Cointegration Test, Variance Decomposition.