Informational Uncertainty and Nonlinear Exchange-Rate Dynamics: A Quantum-Inspired Framework for INR/USD Volatility

Abstract

The currently existing exchange rate models mainly incorporate currency fluctuations through macroeconomic variables including inflation, interest rate differentials, trade balances and monetary policies impact. While these frameworks have continuously provided explanations for long term exchange rate behavior, they increasingly continue to struggle with accounting for sudden non linear movements in emerging markets during instabilities, commodity shocks and quick informational changes. The Indian Rupee (INR) in focus since the post 2020 global economic environment has shown high sensitivity not only to macroeconomic fundamentals but also to investor sentiment, digital financial narratives, global uncertainty and the rate of information transfer across connected financial systems in the country. This paper proposes a new conceptual framework called “Quantum Informational Currency Dynamics (QICD)” to explain this probabilistic and informational nature of exchange rate instability in emerging market economies. It aims to derive conceptually from quantum probability theory, behavioral finance and narrative economics. This study argues that the Indian Rupee behaves not only as a macroeconomic factor but also as an informational system constituting competing expectations, narrative interactions and uncertainty propagation. The paper introduces the Quantum Currency Instability Index (QCII) which is a composite framework designed to measure different periods of elevated informational instability using big components. These components comprise of commodity stress, narrative uncertainty, capital flow pressure and central bank stability. Using the INR/USD Exchange rates between 2020-2025 as a case study, this research focuses on how geopolitical shocks, commodity inflation, Federal Reserve tightening cycles, and domestic financial narratives added up to the nonlinear currency dynamics in India. Instead of attempting to replace classical exchange rate theories, this study aims to support them by adding informational and behavioral dimensions into the understanding of emerging market currency volatility. The paper argues that informational uncertainties and narrative expectations play a big role in the exchange rate instability during crisis time periods and that upcoming macro-financial research should account for these interactions between economies, information systems and investor psychology.

Keywords

Convergence Science - Social Science

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