Determinants of Exchange Rate in India

Article (PDF Available)inSSRN Electronic Journal · April 2008with249 Reads
DOI: 10.2139/ssrn.1165602
Abstract
Appreciation or depreciation of the domestic currency depends on the supply of foreign exchange reserves, liquidity conditions in the economy as determined by money supply, central bank's policy intentions and differences in the interest yield on dated securities of the concerned economies. The present research tests validity of this hypothesis in association with the exchange rate between the Indian rupee and the US dollar. In particular, an attempt is made to investigate the impact of bank rate policy of the Reserve Bank of India (RBI) and interest yield differentials between the India and the US securities. Impact of broad money supply and foreign exchange reserves is also analyzed. A monthly time series from April 1996 to June 2007 is used for the purpose. It is observed that the monetary policy intentions depicted by the bank rate of the RBI, the short-term and long-term domestic interest differentials and interest yield differentials, and the rate of change of foreign exchange reserves have a significant impact on the monthly average of the exchange rate between Indian rupee and the US dollar and quite in line with the economic theory.
Electronic copy available at: http://ssrn.com/abstract=1165602
1
DETERMINANTS OF EXCHANGE RATE IN INDIA
By
Dr. Mita H. Suthar
Abstract
Appreciation or depreciation of the domestic currency depends on the supply of foreign
exchange reserves, liquidity conditions in the economy as determined by money supply,
central bank’s policy intentions and differences in the interest yield on dated securities of
the concerned economies. The present research tests validity of this hypothesis in
association with the exchange rate between the Indian rupee and the US dollar. In
particular, an attempt is made to investigate the impact of bank rate policy of the Reserve
Bank of India (RBI) and interest yield differentials between the India and the US
securities. Impact of broad money supply and foreign exchange reserves is also
analyzed. A monthly time series from April 1996 to June 2007 is used for the purpose. It
is observed that the monetary policy intentions depicted by the bank rate of the RBI, the
short-term and long-term domestic interest differentials and interest yield differentials,
and the rate of change of foreign exchange reserves have a significant impact on the
monthly average of the exchange rate between Indian rupee and the US dollar and quite
in line with the economic theory.
JEL Classification: E51, E52, F31
Key Words: Foreign exchange rate, interest yield differentials
Head of the Economics Department, H. L. Institute of Commerce, Navrangpura, Ahmedabad 380 009,
India; e-mail: mitasuthar@yahoo.com
Significantly modified version of the original paper that was presented at 2006 South and South-East Asia
Econometric Society Annual Meeting held at Chennai, India, during December 18-20, 2006. I am thankful
to the participants at the meeting for their useful comments.
Electronic copy available at: http://ssrn.com/abstract=1165602
2
DETERMINANTS OF EXCHANGE RATE IN INDIA
By
Dr. Mita H. Suthar
1. INTRODUCTION
Foreign exchange rate is the price of a unit of foreign currency in terms of the domestic
currency. In a floating exchange rate mechanism, foreign exchange rate is determined
much in the same way as the price of any commodity in a free market economy.
Appreciation or depreciation of the domestic currency thus depends on the supply of
foreign exchange reserves, liquidity conditions in the economy as determined by money
supply, central bank’s policy intentions and differences in the interest yield on dated
securities of the concerned economies.
Literature on similar studies for various economies, especially developed
economies, is an inspiration for the present work. (See Bhanumurthy, 2006; Drine &
Rault, 2003; Ibarra, 2005; and MacDonald & Nagayasu, 1999; among others.) At the
same time, there is a need to understand the determinants of foreign exchange rate under
the shifting exchange rate policy in case of Indian economy. The present article
discusses validity of the hypothesis that interest rate structure can prove to be significant
determinant of exchange rate along with the impact of changes in liquidity, i.e., changes
in broad money supply and foreign exchange reserves. A monthly time series from April
1996 to June 2007 is used for the purpose.
3
For an emerging economy like India, reduction in exchange rate volatility is not
the single most important objective of the monetary authority. Over the years, the RBI
has adopted twin objectives of high, sustainable economic growth and stability in the
price level. However, with increasing integration of the Indian economy with the world
economy on one hand, and an attempt towards fuller capital account convertibility
gradually on the other hand; reduction in the exchange rate volatility gains significance as
an objective of monetary policy of the RBI. These three objectives are not in tandem
with one another, and all cannot be attained simultaneously. An appropriate balance
among the three is needed to render stable and sustainable growth and development to the
economy and also reflect healthy state of the economy to the rest of the world.
Chart 1 shows the high range of volatility in rupee-dollar exchange rates over the
last eleven years. While the rate of depreciation peaked at 5.320 per cent in December
1997, appreciation registered a high of 4.265 per cent in April 2007. Other major
fluctuations in the exchange rate are also shown in the chart. This clearly implies that
there has been a significant variation of almost nine-and-a half per cent in the exchange
rate.
5.320
4.377
3.004
-2.726
-4.265
-6
-4
-2
0
2
4
6
Apr
-
96
Sep
-
96
Feb
-
97
Jul
-
97
Dec
-
97
May
-
98
Oct
-
98
Mar
-
99
Aug
-
99
Jan
-
00
Jun
-
00
Nov
-
00
Apr
-
01
Sep
-
01
Feb
-
02
Jul
-
02
Dec
-
02
May
-
03
Oct
-
03
Mar
-
04
Aug
-
04
Jan
-
05
Jun
-
05
Nov
-
05
Apr
-
06
Sep
-
06
Feb
-
07
MONTHLY CHANGES IN EXCHANGE RATE IN
PERCENTAGE
MONTH-YEAR
CHART 1: APPRECIATION AND DEPRECIATION IN DOLLAR-RUPEE
EXCHANGE RATE
4
What are the major determinants of exchange rate between the US dollar and
Indian rupee? This question is of utmost importance especially since the US is the single
largest trading partner of India. Not only that, the US dollar is the major international
currency, in spite of emergence of euro as a strong competitor. And, considering the
economic strength of the US economy, it is bound to continue as a major currency during
the coming few years. Section 2 establishes theoretical framework for the determinants
of exchange rate, with special consideration to Indian economy. This is essential to test
the hypothesis that interest rates in various capacities are major determinants of exchange
rate between the US dollar and Indian rupee. Empirical results are presented in section 3;
while observations about the significance of various determinants and the stance of the
RBI are discussed in section 4. Lastly, section 5 concludes.
2. EXCHANGE RATE DETERMINATION MECHANISM
2.1. THE BANK RATE:
Changes in the bank rate indicate the monetary policy intentions of the RBI. If such a
change is unanticipated, economic agents alter their expectations regarding the future
monetary policy. Thus, an increase in the bank rate indicates a tight monetary policy, and
is counter-reacted with an expectation that the bank rate will decline in future. This
results in a depreciation of the domestic currency. On the contrary, the increase in bank
rate may also result in further tightening of the monetary policy by the RBI, which is
necessary for lowering the inflation in the domestic economy as against the foreign
economy.
5
A future appreciation of domestic currency is anticipated here, causing an
appreciation of the current exchange rate. To incorporate this effect, data on bank rate
are included. Simultaneously, the impact of the differences between the cost of long-
term and short-term liquidity are also included by introducing the difference between
inter-bank call money rate and the bank rate. Five-period lag values point out any lag
effect of the same on the exchange rate.
2.2. INTEREST YIELD DIFFERENTIALS:
The relation between short-term and long-term interest yield differentials and exchange
rate is complex. An increase in the interest differential between domestic securities and
foreign securities indicates a rise in the gain from capital inflows into the economy. This
is expected to result in a depreciation of the domestic currency.
The nominal interest differential reflects both the real interest differential and the
inflation differential. The inverse relation between the exchange rate and nominal
interest differential is due to the inflation differential. Thus, if inflation in India exceeds
the inflation in the US, the nominal interest differential is positive, making a positive gain
on capital in India possible. This hypothesis is investigated by incorporating two types of
interest yields in the model: one, the long-term differential is between the interest yield
on 10-year dated securities of India and the US; and two; the short-term differential is
between the interest yield on 90-day securities of India and the US.
6
2.3. LIQUIDITY:
The growth rates of broad money and foreign exchange reserves indicate increased
liquidity in the economy. Such an increase in the liquidity is expected to cause
depreciation in the exchange rate. An anticipation of inflation due to increased liquidity
and increase in the aggregate demand are two major causes behind such depreciation.
However, an increase in the foreign exchange reserves also implies an increase in the
supply of foreign currency, which often results in appreciation of the domestic currency.
This is investigated by introducing the growth rate of broad money and the
growth rate of foreign exchange reserves as explanatory variables in the model. The
bank rate also has an impact on these indicators of liquidity, and has an indirect impact
on the exchange rate.
2.4. EXTERNAL SHOCKS:
Two dummy variables, D1 and D2, are introduced to capture the impact of external
shocks to the exchange rate mechanism. The first such shock relates to the month of
December 1997. In spite of strong economic fundamentals, market sentiment weakened
sharply during September 1997 to January 1998. Profit taking by FIIs on the stock
exchanges added to the pressure on the rupee in November. The market was driven by
downside expectations created largely in the backwash of the currency turmoil in South-
East Asia and political developments within the country. Excess demand conditions
reflected in the intensified spot merchant transactions too. The volatility in the exchange
market and the swing in the market sentiments were reflected in the significant spurt in
7
inter-bank and merchant turnover by November and December 1997 in relation to April-
June 1997 levels. Over the quarter October-December 1997, there was a nominal
depreciation of the spot exchange rate by about 7.6 per cent, and the value of rupee
eroded by more than 5.3 per cent in the month of December alone.
Another major shock was felt in April 2007, when the rupee appreciated by
almost 4.3 per cent. This was mainly due to strong domestic economic growth vis-à-vis
moderating of the US economy during the previous two years, robust growth in the euro
area and narrowing interest differentials. Large capital inflows due to increasing investor
interest, dampening crude oil prices in the world market and depreciation in dollar against
other currencies further added to appreciation of the rupee.
3. THE EMPIRICAL RESULTS
The above hypotheses are tested using the linear model for a period of 135 months. Five-
month lag effects of the exchange rate and the call rate-bank rate differential are also
introduced in the model. Simple econometric analysis through ordinary least squares
(OLS) method is presented below in table 1. Thus percentage variation in dollar-rupee
exchange rate is defined as a function of five months lag values of exchange rate,
difference between call rate and bank rate, including its lag effect for five months,
interest yield differentials between 90 days T-bills of India and the US as well as 10-year
government securities of India and the US, money supply in India, foreign exchange
reserves and two dummy variables.
8
Table I: Estimation Results
Variables OLS estimate t-value [p-value]
LAG1[%DIF1[ExRt]] 0.657495 4.342 [0.00001] *
LAG2[%DIF1[ExRt]] - 0.181683 - 1.176 [0.23954]
LAG3[%DIF1[ExRt]] 0.004804 0.040 [0.96795]
LAG4[%DIF1[ExRt]] 0.141856 - 1.072 [0.28382]
LAG5[%DIF1[ExRt]] 0.130586 1.585 [0.11297]
DIF1[Call-BR] - 0.089085 - 2.528 [0.01148] *
LAG1[DIF1[Call-BR]] - 0.148915 - 4.219 [0.00002] *
LAG2[DIF1[Call-BR]] - 0.011386 - 0.320 [0.74911]
LAG3[DIF1[Call-BR]] - 0.007130 - 0.199 [0.84225]
LAG4[DIF1[Call-BR]] - 0.045797 - 1.864 [0.06228] **
LAG5[DIF1[Call-BR]] 0.059711 2.374 [0.01757] *
DIF1[BR] - 0.470849 - 1.730 [0.08361] **
DIF1[Yield10Ind-Yield10US] 0.094114 0.577 [0.56419]
DIF1[Yield90Ind-Yield90US] 0.066681 0.832 [0.40516]
%DIF1[M3] 0.055706 0.887 [0.37489]
%DIF1[ForExRes] - 0.106812 - 4.113 [0.00004] *
D1 4.100964 8.245 [0.00000] *
D2 - 3.776212 - 6.398 [0.00000] *
Intercept 0.170514 1.697 [0.08962] **
R-square = 0.5893
* Significant at 5 per cent level. ** Significant at maximum 10 per cent level.
The model: Y = b(1)X(1) +.....+ b(19)X(19) + U,
Where Y = %DIF1[ExRt], i.e., rate of change in the rupee exchange rate per US dollar
X variables: X(1), …, X(5) = LAG1[%DIF1[ExRt]], …, LAG5[%DIF1[ExRt]]
X(6) = DIF1[Call-BR]
X(7), …, X(11) = LAG1[DIF1[Call-BR]], …, LAG5[DIF1[Call-BR]]
X(12) = DIF1[BR]
X(13) = DIF1[Yield10Ind-Yield10US]
X(14) = DIF1[Yield90Ind-Yield90US]
X(15) = %DIF1[M3]
X(16) = %DIF1[ForExRes]
X(17) = D1, i.e., dummy variable for the month 1997.12
X(18) = D2, i.e., dummy variable for the month 2007.04
X(19) = 1
U is the error term, satisfying E[U|X(1),...,X(18)] = 0.
9
4. OBSEREVATIONS
The table shows that almost 59 per cent variations in the dollar-rupee exchange
rates are due to the variables included in the model. Thus, the changes in domestic
interest rates are a significant source of appreciation or depreciation of rupee. However,
the interest rate differences between India and the US are not so significant determinants.
The first period lag effect of exchange rate is positive, indicating contribution of
the past changes in building up the anticipation of the economic agents as far as the
exchange rate changes are concerned. While the call rate-bank rate differential depicts a
negative, but significant first period lag effect. This indicates that an increase in the
difference between the call rate and bank rate leads to an appreciation of rupee.
The call rate-bank rate differential has a negative impact, indicating appreciation
of the domestic currency with an increase in the previous period’s call rate-bank rate
differential. This shows that RBI policy, as reflected by this differential, leads economic
agents to anticipate a continuation of the policy in future. That is, a tighter monetary
policy regime leads to anticipation for a further tightening of monetary policy regime in
future, which results in appreciation of rupee against dollar. However, correction
mechanism sets in after a quarter, indicating that positive impact of tighter monetary
regime have settled in, and the exchange rate will depreciate as a consequence of a rise in
the bank rate and subsequently easing out of the access liquidity.
10
The variables of specific interest here are the bank rate, long-term yield and short-
term yield differentials, growth of money supply and growth rate of foreign exchange
reserves. All variables, except the bank rate and the growth rate of foreign exchange
reserves are insignificant.
The bank rate is an indicator of long-term monetary policy intentions of the RBI.
The negative value of the coefficient of changes in the bank rate indicates that an increase
in the bank rate leads to an appreciation of the domestic currency. This is because the
economic agents form confirmatory anticipation regarding the future bank rate policy to
control high rates of inflation and contain the growth of money supply in the economy.
Not only the anticipation effect, but also the immediate cost of the domestic investment
to increase since the rise in bank rate is followed by a rise in all interest rates across the
board. As the investment funds flow tightens in the economy, the value of the domestic
currency appreciates against the foreign currency.
However, both long-term interest yield differential {DIF1[Yield10Ind-
Yield10US]} and the short-term interest yield differential {DIF1[Yield90Ind-
Yield90US]} have a positive (but insignificant) impact on the exchange rate. An increase
in the interest yield differentials implies that comparative return on investment in India is
higher than in the US. Again this may be due to scarcity of capital resources in the
domestic economy as against the foreign economy and / or inflationary pressure in the
domestic economy. This results in greater investment inflow in the Indian economy,
leading to depreciation of rupee against the US dollar. Interestingly, the short-term
11
interest yield differential appears to be more significant than the long-term interest yield
differential with relatively low p-value.
Growth of money supply in India, in isolation, is not a significant determinant of
exchange rate between the rupee and the dollar. This may be due to the fact that the
impact of growth of money supply on the national income is not taken into consideration.
Similarly, a comparison between the rate of change on money supply in India and that in
the US may have greater explanatory power in exchange rate determination. However,
rate of change in the foreign exchange reserves is a highly significant determinant of
exchange rate. This reflects a direct, but negative, supply side impact on the price of the
foreign currency in terms of the domestic currency. An increase in the foreign exchange
reserves causes increase in the supply of foreign currency, and builds up liquidity
pressure in the economy. Such pressure causes the exchange rate to appreciate.
Interestingly, the RBI recognizes the significance of interest rate in providing
stability to exchange rate in India as the monetary authority prepares for full
convertibility on capital account. The Report of the Committee on Fuller Capital
Account Convertibility categorically accepts that volatility in exchange rate is caused due
to flexible exchange rate policy, inflationary pressure and capital inflow. Further, it
accepts that interest rate management can be a more efficient tool to control volatility in
exchange rate. For this, it will be necessary to align the domestic interest rates with the
international interest rates, and also to reduce the misalignment between short-term and
long-term interest rates within the Indian money market.
12
5. SUMMARY AND CONCLUSIONS
The objective of this article is to show the impact of various supply-side variables
considered to be significant in exchange rate determination. These include the
unanticipated changes in the monetary policy, as well as the conventional determinants
like money supply and foreign exchange reserves. It is observed that the monetary
policy intentions depicted by the bank rate of the RBI, the short-term and long-term
domestic interest differentials, and the rate of change of foreign exchange reserves have a
significant impact on the monthly average of the exchange rate between Indian rupee and
the US dollar. The interest yield differentials do not show a very significant impact,
however. Further, the impact of these explanatory variables is quite in line with the
economic theory. Though the exchange rate determination may depend on several other
variables, these variables may be targeted by the monetary authority efficiently to
regulate exchange rate movements in case of unwarranted volatility.
13
REFERENCES
1. Bhanumurthy, N. R. (2006) “Macroeconomic Fundamentals and Exchange Rate
Dynamics in India: Some Survey Results”, Draft Paper,
www.igidr.ac.in/~money/mfc_06/bhanuigidr.pdf
2. Drine, Imed and Christophe Rault. (2003) “On the Long-Run Determinants of
Real Exchange Rates for Developing Countries: Evidence from Africa, Latin
America and Asia”, William Davidson Working Paper Number 571, May
3. Ibarra, Carlos A. (2005) “The Behaviour of Interest Rate Differentials under
Shifting Exchange Rate Regimes: The Experience of Chile, Colombia and Israel”,
Cuadernos de Economia Vol. 42 (Mayo), pp. 103-131
4. MacDonald, Ronald and Jun Nagayasu. (1999) “The Long-Run Relationship
Between Real Exchange Rates and Real Interest Differentials: A Panel Study”,
IMF Working Paper WP/99/37, March
5. Reserve Bank of India. (1998-2007) Annual Report, various issues
6. Reserve Bank of India. (2007) Handbook of Statistics on Indian Economy
7. Tarapore, S. S. (2006) Report of the Committee on Fuller Capital Account
Convertibility, Reserve Bank of India, July
14
ANNEXURE 1: MONTHLY DATA ON EXCHANGE RATE DETERMINANTS
Month
Exchange
Rate
(Rupee-
US
Dollar)
Call
Rate
Bank
Rate
Yield 10
Years
Government
Securities
India
Yield 90
Days
Treasury
Bills
India
Yield 10
Years
Government
Securities
US
Yield 90
Days
Treasury
Bills US
Broad
Money
M3 (Rs.
Crore)
Foreign
Exchange
Reserves
(Rs. Crore)
Apr-96
34.2391
11.38
12
13.9551
13.7002
6.51
5.09
609258
21620
May-96
35.0105
10.88
12
13.9551
11.7592
6.74
5.15
611251
21620
Jun-96
34.9803
10.87
12
13.9551
11.8561
6.91
5.23
619531
22091
Jul-96
35.505
3.59
12
13.9551
8.6692
6.87
5.3
622165
22441
Aug-96
35.6955
6.07
12
13.8973
8.821
6.64
5.19
625777
22441
Sep-96
35.7284
8.36
12
13.8973
10.0016
6.83
5.24
638358
22900
Oct-96
35.6404
9.58
12
13.671
9.1712
6.53
5.12
641243
23635
Nov-96
35.7353
6.26
12
13.6601
7.8191
6.2
5.17
648652
23752
Dec-96
35.8352
8.07
12
13.7528
7.6383
6.3
5.04
653548
24110
Jan-97
35.8699
4.84
12
13.66
7.8424
6.58
5.17
669411
23973
Feb-97
35.8892
5.08
12
13.4275
7.5194
6.42
5.14
676367
23674
Mar-97
35.8697
4.35
12
13.4328
7.4239
6.69
5.28
696012
26423
Apr-97
35.8139
1.22
11
12.8648
3.6892
6.89
5.3
708509
26667
May-97
35.8145
5.9
11
12.8741
7.0824
6.71
5.2
716052
28096
Jun-97
35.8095
5.16
10
12.5858
5.2348
6.49
5.07
724347
29331
15
Jul-97
35.7372
3.77
10
11.6555
6.3909
6.22
5.19
726205
29789
Aug-97
35.92
5.86
10
11.5798
5.3347
6.3
5.28
728929
30228
Sep-97
36.4318
6.71
10
11.8622
6.7813
6.21
5.08
744252
29435
Oct-97
36.226
6.25
9
10.8648
6.5818
6.03
5.11
752822
30022
Nov-97
37.2358
6.13
9
10.9653
6.2327
5.88
5.28
763584
27893
Dec-97
39.2168
8.21
9
11.1751
7.7715
5.81
5.3
768304
27355
Jan-98
39.3843
28.7
11
13.3477
13.7015
5.54
5.18
778587
27838
Feb-98
38.8871
9.7
11
12.6259
11.0945
5.57
5.23
791408
27461
Mar-98
39.5007
8.75
10.5
12.1175
9.4993
5.65
5.16
821332
29367
Apr-98
39.6572
6.73
10
11.9194
7.5294
5.64
5.08
836895
29452
May-98
40.4708
6.75
9
12.1312
9.3244
5.65
5.14
845958
28671
Jun-98
42.2423
6.42
9
12.1086
7.6037
5.5
5.12
854466
27034
Jul-98
42.5102
6.02
9
12.1923
6.932
5.46
5.09
863461
27088
Aug-98
42.7563
7.59
9
12.2001
10.0539
5.34
5.04
883276
27765
Sep-98
42.5217
8.41
9
12.272
9.165
4.81
4.74
901150
29182
Oct-98
42.3338
8.42
9
12.2947
9.695
4.53
4.07
915011
29757
Nov-98
42.381
8
9
12.2221
9.478
4.83
4.53
919220
29667
Dec-98
42.553
8.33
9
12.2326
9.3558
4.65
4.5
923698
30056
Jan-99
42.5061
10.04
9
12.2489
8.8562
4.72
4.45
940234
30445
Feb-99
42.4656
8.86
9
12.3306
9.3993
5
4.56
951197
30758
Mar-99
42.4487
8.49
8
12.0324
8.7013
5.23
4.57
980960
32490
16
Apr-99
42.725
8.02
8
11.8903
8.6063
5.18
4.41
994160
32538
May-99
42.7712
8.76
8
11.7293
8.5911
5.54
4.63
1004358
33475
Jun-99
43.1355
8.1
8
11.862
8.726
5.9
4.72
1010682
33265
Jul-99
43.285
8.21
8
11.7061
8.7464
5.79
4.69
1023354
33422
Aug-99
43.4594
9.38
8
11.6356
9.1679
5.94
4.87
1031774
33269
Sep-99
43.5349
9.67
8
11.5811
9.1254
5.92
4.82
1050431
33203
Oct-99
43.4493
10.95
8
11.5924
9.7032
6.11
5.02
1062314
33805
Nov-99
43.3968
8.07
8
11.4341
8.5906
6.03
5.23
1070116
34359
Dec-99
43.485
7.74
8
11.2471
8.2332
6.28
5.36
1095461
34935
Jan-00
43.55
7.87
8
10.9434
8.6254
6.66
5.5
1094368
34896
Feb-00
43.6136
10.31
8
10.4416
8.7364
6.52
5.73
1111108
35903
Mar-00
43.5862
9.39
8
10.8663
10.0878
6.26
5.86
1124174
38036
Apr-00
43.6388
6.79
7
10.3663
8.0696
5.99
5.82
1154093
37896
May-00
43.9829
7.48
7
10.8186
8.6201
6.44
5.99
1161394
37245
Jun-00
44.6893
11.08
7
11.1004
9.7122
6.1
5.86
1177524
36730
Jul-00
44.7788
7.77
8
11.3
8.5493
6.05
6.14
1178053
36231
Aug-00
45.68
13.06
8
11.3715
11.0161
5.83
6.28
1185598
35619
Sep-00
45.8883
10.32
8
11.8051
10.0974
5.8
6.18
1203254
35438
Oct-00
46.3445
9.07
8
11.6078
9.4619
5.74
6.29
1223187
34899
Nov-00
46.7789
9.28
8
11.4009
9.3421
5.72
6.36
1253290
39040
Dec-00
46.7496
8.76
8
10.9359
9.2538
5.24
5.94
1272412
40077
17
Jan-01
46.5439
9.89
8
10.4842
9.0769
5.16
5.29
1276376
41120
Feb-01
46.5167
8.51
7.5
10.0447
8.279
5.1
5.01
1290702
41608
Mar-01
46.6205
7.78
7
10.2737
8.493
4.89
4.54
1313220
42281
Apr-01
46.7835
7.49
7
10.0779
7.6029
5.14
3.97
1350614
42526
May-01
46.9202
8.03
7
9.7149
7.414
5.39
3.7
1369482
42991
Jun-01
47.0038
7.24
7
9.4551
7.0545
5.28
3.57
1384395
43454
Jul-01
47.1393
7.19
7
9.2609
7.0345
5.24
3.59
1387649
43730
Aug-01
47.1265
6.94
7
9.1394
6.982
4.97
3.44
1398511
45358
Sep-01
47.642
7.3
7
9.1468
6.9294
4.73
2.69
1407906
44877
Oct-01
48.0198
7.4
6.5
8.7893
6.671
4.57
2.2
1420842
45256
Nov-01
47.9947
6.97
6.5
7.9239
6.4669
4.65
1.91
1439227
46891
Dec-01
47.9176
7.08
6.5
8.2666
6.9184
5.09
1.72
1450506
48112
Jan-02
48.3287
6.63
6.5
7.6474
6.4843
5.04
1.68
1458425
49479
Feb-02
48.6893
6.73
6.5
7.4725
6.2329
4.91
1.76
1474385
50776
Mar-02
48.7371
6.97
6.5
7.3437
5.9177
5.28
1.83
1498355
54106
Apr-02
48.9183
6.58
6.5
7.3952
6.0097
5.21
1.75
1542227
55870
May-02
48.9968
6.9
6.5
7.6529
6.4259
5.16
1.76
1605225
56779
Jun-02
48.9665
6.04
6.5
7.5701
6.1419
4.93
1.73
1609476
58693
Jul-02
48.7635
5.75
6.5
7.3733
5.828
4.65
1.71
1614181
60607
Aug-02
48.5852
5.72
6.5
7.156
5.753
4.26
1.65
1630709
62140
Sep-02
48.44
5.75
6.5
7.1976
5.7139
3.87
1.66
1640398
63620
18
Oct-02
48.3714
5.73
6.25
6.9791
5.516
3.94
1.61
1658925
65159
Nov-02
48.2545
5.45
6.25
6.4573
5.1018
4.05
1.25
1673538
67578
Dec-02
48.1405
5.58
6.25
6.0818
5.4337
4.03
1.21
1682014
71110
Jan-03
47.9328
5.66
6.25
6.339
5.5742
4.05
1.19
1693749
74256
Feb-03
47.7347
5.71
6.25
6.2321
5.529
3.9
1.19
1707306
73547
Mar-03
47.6395
5.86
6.25
6.1936
5.6552
3.81
1.15
1717960
76100
Apr-03
47.3758
4.87
6
5.9053
4.5977
3.96
1.15
1770558
78325
May-03
47.0816
4.87
6
5.8479
4.6704
3.57
1.09
1784717
82308
Jun-03
46.7098
4.91
6
5.7329
4.9326
3.33
0.94
1802324
83221
Jul-03
46.23
4.9
6
5.6206
4.6897
3.98
0.92
1806665
85551
Aug-03
45.933
4.83
6
5.262
4.6448
4.45
0.97
1819454
87306
Sep-03
45.8471
4.5
6
5.2589
4.5441
4.27
0.96
1831608
92339
Oct-03
45.3873
4.64
6
5.1052
4.7328
4.29
0.94
1864886
93803
Nov-03
45.5221
4.38
6
5.1433
4.2324
4.3
0.95
1874932
97400
Dec-03
45.588
4.4
6
5.1368
4.2052
4.27
0.91
1896318
103151
Jan-04
45.4557
4.43
6
5.1911
4.3092
4.15
0.9
1922696
106384
Feb-04
45.2703
4.33
6
5.2703
4.332
4.08
0.94
1959412
109572
Mar-04
45.0179
4.37
6
5.1542
4.3277
3.83
0.95
2005676
112959
Apr-04
43.9311
4.29
6
5.1461
4.3609
4.35
0.96
2060153
118490
May-04
45.2508
4.3
6
5.3016
4.3831
4.72
1.04
2060166
119379
Jun-04
45.5068
4.35
6
5.8677
4.3738
4.73
1.29
2075507
119511
19
Jul-04
46.0416
4.31
6
6.1935
4.4679
4.5
1.36
2083368
118385
Aug-04
46.341
4.41
6
6.1545
4.5086
4.28
1.5
2104000
118154
Sep-04
46.095
4.45
6
6.2446
4.7893
4.13
1.68
2092506
119579
Oct-04
45.7826
4.63
6
6.8652
4.9898
4.1
1.79
2133922
121337
Nov-04
45.1251
5.62
6
7.2053
5.1903
4.19
2.11
2134846
128226
Dec-04
43.9796
5.28
6
6.591
5.3304
4.23
2.22
2145964
131178
Jan-05
43.7545
4.72
6
6.7091
5.141
4.22
2.37
2193202
129463
Feb-05
43.6798
4.76
6
6.4867
5.0448
4.17
2.58
2218219
135900
Mar-05
43.6905
4.72
6
6.6853
5.1531
4.5
2.8
2251449
141514
Apr-05
43.7412
4.77
6
7.1866
5.1551
4.34
2.84
2336249
141841
May-05
43.4889
4.99
6
7.0602
5.1573
4.14
2.9
2347098
138857
Jun-05
43.5836
5.1
6
6.8835
5.3604
4
3.04
2360115
138370
Jul-05
43.5361
5.02
6
6.9451
5.3117
4.18
3.29
2375747
140542
Aug-05
43.6245
5.02
6
7.1918
5.129
4.26
3.52
2402095
144079
Sep-05
43.915
5.05
6
7.2081
5.148
4.2
3.49
2482572
143059
Oct-05
44.818
5.12
6
7.0784
5.4832
4.46
3.79
2489063
143573
Nov-05
45.7265
5.79
6
7.1108
5.6576
4.54
3.97
2504892
142821
Dec-05
45.6411
6
6
7.1191
6.055
4.47
3.97
2527676
137206
Jan-06
44.397
6.83
6
7.309
6.5959
4.42
4.34
2536207
140374
Feb-06
44.3289
6.95
6
7.3441
6.6533
4.57
4.54
2579947
142400
Mar-06
44.481
6.58
6
7.5291
6.1
4.72
4.63
2729545
151622
20
Apr-06
44.9491
5.62
6
7.3941
5.5176
4.99
4.72
2772379
160677
May-06
45.4073
5.54
6
7.6809
5.5442
5.11
4.84
2779279
163868
Jun-06
46.0561
5.73
6
8.1318
6.2844
5.11
4.92
2784956
162912
Jul-06
46.4562
5.86
6
8.2809
6.3575
5.09
5.08
2836479
164577
Aug-06
46.537
6.06
6
7.9304
6.2027
4.88
5.09
2879043
166244
Sep-06
46.1181
6.33
6
7.6776
6.59
4.72
4.93
2953356
165305
Oct-06
45.4676
6.75
6
7.6417
6.5197
4.73
5.05
2946329
167392
Nov-06
44.8507
6.69
6
7.4061
6.2467
4.6
5.07
2993258
174641
Dec-06
44.6351
8.63
6
7.6071
7.2496
4.56
4.97
3016308
177251
Jan-07
44.3325
8.18
6
7.7739
7.2936
4.76
5.11
3073887
180161
Feb-07
44.1583
7.16
6
7.9454
7.101
4.72
5.16
3144572
194563
Mar-07
44.026
14.07
6
7.936
7.5567
4.56
5.08
3310278
199179
Apr-07
42.1482
8.33
6
8.1316
7.3701
4.69
5.01
3321799
204409
May-07
40.7814
6.96
6
8.1225
6.4405
4.75
4.87
3325860
208068
Jun-07
40.7736
2.42
6
8.1559
6.9877
5.1
4.74
3388916
213362
  • [Show abstract] [Hide abstract] ABSTRACT: The paper attempts to determine the factors affecting the real exchange rate in India. The fundamental determinants considered are productivity differences, government expenditure, foreign institutional investment, openness of the economy, interest rate differentials, inflation differentials, terms of trade, foreign exchange reserves and net foreign assets. The ARDL bounds testing approach confirms the long run relationship between the real exchange rate and these variables for the quarterly data 1993Q1-2011Q4. The error correction term also indicated 76 percent of the convergence towards the long run equilibrium level in the next quarter. The study confirmed the expected theoretical relationship between the variables and the real exchange rate in the long run.
    Full-text · Article · Sep 2013
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