Rupee-Dollar Rate Trends:Co-Integration Analysis

The long run dynamics of Indian foreign exchange market with respect to Indian Rupee-US Dollar spot rate can be attributed to interplay of several domestic, foreign and global factors. This paper attempts to identifies whether there exists any long term equilibrium relationship among macroeconomic variables of India and US, Indian Rupee-Euro spot rate, Indian Rupee-Yen spot rate, Indian Rupee-UK Pound spot rate and Indian Rupee-US Dollar spot rate. Time series analysis has been undertaken for ten year period of April, 2005 –March, 2015 using monthly data of these variables. The 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, Indian rupee-euro spot rate, Indian rupee-British pound spot rate and Indian rupee-Japanese yen spot rate. Johansen’s co-integration analysis indicates that all Indian and US macroeconomic variables and other currency pairs of rupee are in a long run relationship with rupee-dollar spot rate.