Modeling Exchange Rate Volatility in India in Relation to COVID-19 and Lockdown Stringency: A Wavelet Coherence and Quantile Causality Approach

Aamir Aijaz Syed, Assad Ullah, Simon Grima (), Muhammad Abdul Kamal and Kiran Sood
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Aamir Aijaz Syed: Institute of Management, Commerce and Economics, Shri Ramswaroop Memorial University, Barabanki 225003, India
Assad Ullah: School of Economics and Management, Hainan Normal University, Haikou 571127, China
Simon Grima: Department of Insurance and Risk Management, Faculty of Economics, Management and Accountancy, University of Malta, MSD 2080 Msida, Malta
Muhammad Abdul Kamal: Department of Economics, Abdul Wali Khan University, Mardan 23200, Pakistan
Kiran Sood: Chitkara Business School, Chitkara University, Rajpura 140401, India

Risks, 2025, vol. 13, issue 9, 1-26

Abstract: The COVID-19 pandemic and the implementation of strict lockdown measures have significantly impacted various dimensions of the global economy. This study examines the impact of COVID-19 and lockdown stringency on exchange rate volatility in India using three core variables, i.e., COVID-19 cases, the lockdown stringency index, and exchange rate volatility. To achieve the above objectives, we have employed advanced econometric techniques, such as wavelet coherence and a hybrid non-parametric quantile causality framework, on the dataset spanning from 30 December 2020 to 24 January 2022. Robustness is assessed using Troster–Granger causality in quantiles and Breitung–Candelon Spectral Causality tests. The wavelet coherence analysis indicates that the initial outbreak of COVID-19 increased the exchange rate volatility, while the enforcement of stringent lockdowns in the later phases helped reduce this volatility. Similarly, the hybrid quantile causality results indicate that both COVID-19 cases and lockdown measures possess predictive power over exchange rate fluctuations. The robustness checks confirm these findings and establish a causal relationship between the pandemic, policy responses, and currency market behaviour. This study helps clarify the complex, nonlinear dynamics between pandemic-related variables and exchange rate volatility in emerging markets. Based on the aforementioned result, it is recommended that policymakers implement targeted lockdown strategies coupled with timely monetary interventions (such as foreign exchange reserve management or interest rate adjustments) to mitigate volatility and maintain currency stability during future pandemic-induced shocks.

Keywords: lockdown stringency; exchange rate volatility; wavelet; non-parametric quantile causality; COVID-19 (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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