In this paper we have analyzed the relationship between Indian rupess-USdollar exchange rate and Nifty returns. This research is based on dynamic behavior between stock markets movement and volatility of stock market for this purpose; we have applied several statistical tests. .we have taken the data from period of October 2008, to march, 2010.It study has proved that exchange rate and Nifty returns are non-normally disturbed. Unit root tests have proved that Nifty returns and exchange rate are stationary and they are stationary at level form. There is negative relationship between exchange rate and Nifty returns exchange rate. For testing the causal relationship between these variables we have used Granger causality test.This test has shown that there is unidirectional relationship between exchange rate and Nifty returns. This study is trying to attempt that stock market is crucial for the economy. Different researchers have proved from their research that exchange rate is the main determinates of business profitability. This study has provided such type of information, which would favorable for the gaudiness of management decision about the risk and investment. This information will beneficial for government policies. The maintained of foreign exchange would motive the foreign investors.