Forecasting Exchange Rate

Abstract

The objective of the study is to determine a model to forecast the exchange rate of four currencies such as US dollar, British Pound, Japanese Yen and European EURO with respect to Indian Rupee. This study also looks at the past and the present behaviour of the exchange rate. In order to achieve the above objective, the autoregressive integrated moving average (ARIMA) model was used and suitability of the model was checked using t-test and residual analysis. The study was carried using secondary data collected from the website of Reserve Bank of India (RBI). The study confirms that the exchange rate is likely to show a slow increase in the US dollar, British Pound, and European EURO, whereas the exchange rate of Japanese Yen is likely to remain constant. At present, the structure of the financial market is very complex, thus making the forecasting of exchange rates very complicated. However, an idea about future movements in the exchange rates will be an added advantage to the policy-makers in the government, exporters, importers, forex dealers, etc., to hedge their businesses against currency fluctuations and manage their affairs efficiently.