Testing Purchasing Power Parity between India and US

In today’s competitive world the structure and the direction of external trade are determined by the exchange rate conducts. In other words nominal exchange rate affects competitive power in external trade. Policy makers can use PPP theory as a guide for the external competitive power of a country. Furthermore numerous empirical workings have been presented that misalignment exchange rate causes currency crises and macroeconomic disequilibrium. PPP provides an indicator for the misalignment. The purpose of this paper is to test Purchasing Power Parity between India and US using inflation differential and nominal exchange rate data from 1999 to 2011 on the basis of OLS model. The results indicate that PPP does not hold.