Impact of Exchange Rate on Gold Price in India

Abstract

In this article we investigate the impact of rupee-dollar exchange rates on growth rate of gold price in India over the period 1970-2016. The investigation is done using some steps. In the first step we use Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP) test to detect that the series is stationary or not. To show the long run association of the variables we apply Johansen Co-integration test. As there is no cointegration we apply unrestricted VAR method. Since the study variables are not cointegrated, there is no long run causality, there is only short run causality running from independent variables to dependent variables. Further the Granger Causality test determines whether growth rate of gold price depends on the growth rate of rupee dollar exchange rate or not. At last we also test the stability of the model using Eigen value statistic method. The main finding of this paper is that growth rate of gold price depends negatively and significantly on growth of rupee-dollar exchange rate, means that as rupee dollar exchange rate rises gold price decreases and vice versa. The study also shows that growth rate of gold price does not Granger cause to rupee-dollar exchange rate where as rupee- dollar exchange rate Granger cause to gold price in Indian economy. That is we can stabilise the Gold Price movement by controlling the exchange rate fluctuations.