Mathusha, S.2025-10-252025-10-252020https://ir.lib.pdn.ac.lk/handle/20.500.14444/5726Introduction : The exchange rate is defined as the number of units of domestic currency that are needed to buy one unit of foreign currency. It plays a vital role in a country’s level of trade, which is critical to every free market economy in the world. This is because changes in exchange rates have pervasive effects on prices, wages, interest rates, production levels, and employment opportunities. Further, depreciation and appreciation of the exchange rate affect the economy in different ways. In general, appreciation of a country’s currency lowers the inflation and domestic prices of imports. Also, the burden on foreign debt becomes less. Lower import prices will encourage imports and worsen the country’s trade balance. Exporters will be discouraged by the reduction in their income in domestic currency. Depreciation will have the opposite effect. For these reasons, exchange rate is the most watched economic measure of any country. In Sri Lanka, during the fixed exchange rate period, the currency was devalued from Rs. 4.76 per US$ at the end of 1950 to Rs.15.56 at the end of 1977. After commencing the managed float exchange rate regime, it further depreciated to Rs. 80.06 at the end of 2000. Immediately after the flexible exchange rate regime, the exchange rate depreciated from Rs.93.16 at the end of 2001 to Rs. 182 at the end of 2019. These changes reflect a 415% depreciation during the managed float period of 22 years (nearly 19% per year) and 102% depreciation during the flexible exchange rate system of 18 years (nearly 6% per year) so far. The total currency depreciation is nearly 941% in 40 years of managed and flexible float period which is nearly 23.5% per year on average (www. daily news.lk, 2020). However, it is difficult to identify particular reasons for such different rates of currency depreciation. There are many studies showing the relationship between the exchange rate and its determinants for a number of countries. According to Saeed et al. (2012) stock of money and foreign exchange reserve balance positively contribute to exchange rate appreciation in Parkistan. Further, debt and political instability affect it negatively. Venkatesan and Ponnamma (2017) found that foreign direct investment, Gross Domestic Saving and inflation contribute negatively to the exchange rate in India. Meanwhile, current account deficit and interest rate positively affect the exchange rate. Rajakaruna (2010) has investigated the factors that affect exchange rate fluctuation in Sri Lanka. The study revealed a negative relationship between exchange rate and inflation, interest rate, remittance and terms of trade. In addition, it identified a positive relationship between the exchange rate and net foreign purchase. However, none of the previous studies have considered the relationship between exchange rate and its determinants using the ARDL Bound testing approach in Sri Lanka. Further, this is the first study to include foreign direct investment net inflow, public debt and consumer price index as explanatory variables when estimating factors that affect the exchange rate. These motivate to fill this gap in literature. Further, findings of this study would help policymakers to adopt appropriate strategies and policies regarding exchange rate in Sri Lanka.en-USARDL approachCointegrationExchange rateArticle