Exchange rate volatility plays a critical role in shaping foreign investment flows and macroeconomic stability in emerging economies. India, as one of the largest recipients of Foreign Direct Investment (FDI) among developing nations, has experienced significant fluctuations in its exchange rate regime since economic liberalization in 1991. This study examines the impact of exchange rate volatility on FDI inflows and, subsequently, on India's Gross Domestic Product (GDP). Using a descriptive and causal research design based on secondary data sources, the study explores the relationship between exchange rate movements, investor confidence, sectoral FDI distribution, and overall economic growth. The research also evaluates the effectiveness of government and monetary policies in mitigating exchange rate risks and stabilizing investment flows. Drawing upon theoretical frameworks such as the International Capital Mobility Theory, Portfolio Diversification Theory, and the Eclectic Paradigm, the study highlights how exchange rate uncertainty may either discourage investment due to increased risk or attract FDI through cost competitiveness effects. The findings are expected to provide insights into policy formulation aimed at strengthening macroeconomic stability, enhancing investor confidence, and promoting sustainable GDP growth in India. The study contributes to existing literature by integrating exchange rate dynamics, FDI behaviour, and sectoral impacts within the Indian economic context.
Ved Master (2026) studied this question.