Trends in Indian Rupee-Us Dollar Rate: An Empirical Analysis

Abstract

The paper attempts to identify Indian and US macroeconomic factors and other global factors significantly influencing Indian rupee- US dollar spot rate and also, any long term association among these macroeconomic variables and rupee-dollar spot rates. Time series analysis has been undertaken for ten year period of April, 2005 –March, 2015 using monthly data of these variables. The exogenous variables considered are money stock (India and US), nominal long run bond yield (India and US), commodity price levels (India and US), stock prices (India and US), forward premium in Indian rupee-US dollar forward market, foreign exchange reserves with Reserve Bank of India., foreign institutional investment in India, Indian rupee-euro spot rate, Indian rupee-British pound spot rate and Indian rupee-Japanese yen spot rate. Ordinary least squares regression results indicate that significant non-price variables are foreign exchange reserves and RBI intervention measure, both being negatively related to rupee value. Out of price variables, consumer prices in US, rupee-euro spot rate and rupeepound spot rate are significant variables, all being positively related to rupee value and US 10 year bond yield is negatively related to value of rupee. Johansen’s co-integration analysis indicate that all Indian and US macroeconomic variables and other currency pairs of rupee are in a long run relationship with rupee-dollar spot rate.