The forex footprint of indian student mobility: evidence from LRS remittances and exchange rate dynamics

Abstract

This paper explores the effects of Indian students studying in foreign countries on foreign exchange (ForEx) outflows in terms of the Reserve bank of India liberalised remittance scheme (LRS) and the volatility of the INR-USD exchange rate. In the study, the author tests two hypotheses: (1) outbound students are an important source of forex outflows and (2) the outflows are related to INR volatility. By using Pearson correlation and OLS regression, the study finds strong positive relation in Hypothesis 1 (r= 0.849, p= 0.00012; R 2 = 0.721), meaning that every added student increase outflows by about USD 11,600, thus confirming that there is significant reserve pressure. Hypothesis 2 was rejected (r=-0.269, p=0.374) and therefore a negative association between education and volatility was not found supporting inelastic education demand. These findings are supported with visualizations and sensitivity analyses. The findings note that the need to implement policies such as the National Education Policy 2020 to contain the outflows through domestic education improvement efforts are very essential whereas volatility control is not essential. Answering limitations include small sample (n=14), annual data granularity and suggestions to include granular data, causal modeling and cross-country research. This study addresses this gap in the India specific literature and provides information on balancing educational mobility with macroeconomic stability.