THE DEPRECIATING INDIAN NATIONAL RUPEE: AN EMPIRICAL ANALYSIS
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Altius Shodh Journal of Management and Commerce ISSN 2348 – 8891
THE DEPRECIATING INDIAN NATIONAL RUPEE: AN EMPIRICAL ANALYSIS
*Ms. Ruchi Mehrotra,**Dr. Dhiraj Jain, ***Dr. N. K. Dashora
*Corresponding Author, Ph. D Scholar, Pacific University, Udaipur
**Associate Professor, Symbiosis Centre for Management Studies, Pune
*** Professor, Rajiv Gandhi Tribal University, Udaipur
Abstract
In recent few years, the Indian Rupee exchange rate movement has been a crucial issue for not only corporate
houses but also the common man. All imports directly or indirectly get effected by the INR movements vis a vis
most traded currencies which include Pound, Yen and Euro. Rupee had depreciated to its lowest levels in the
last decade and government's exogenous intervention through monetary policy reviews have been to revive
and stabilize Indian rupee and monitor volatility have been not much effective. The authors try to study over
the last decade the Indian rupee movement wrt hard currencies which are most traded with. This is an
empirical study using daily observations for the time period 1st Jan, 2004 to 31st March, 2015 for all four hard
currencies US Dollar, Euro, Pound, Japanese Yen vis a vis INR. Reserve Bank of India reference rate is used and
four structural breaks have been used in the mentioned time frame. Statistical tools like Mean, median, skewness,
kurtosis and standard deviation is used. The conclusion indicates that in pre-recession and even post-recession
period the UDS-INR valuations were in similar range but lately rupee has depreciated too much to a level of
Rs68.36 and even Pound-INR touching Rs106.02. There have highest volatility for Yen-INR during both recession
and post-recession period including Pound-INR. As generally perceived that USDollar is very volatile we conclude
saying even other currencies are equally highly volatile.
Key words: Foreign Exchange, Indian Foreign exchange market, Indian Rupee, Depreciation
Introduction: 2005) and the financial sector reforms in India were
studied relating to number of segments such as banking,
Happenings in the foreign exchange market (henceforth debt markets, FOREX markets, and others like non-
FOREX market) form the essence of the international ba nk in g f ina ncia l c o m pa nie s . The po l ici es a nd
finance. The foreign exchange market is not limited by performance analysis was also impressively studied and
any geographical boundaries. It does not have any regular even the changes in the monetary policy are discussed.
market timings, operates 24 hours 7 days week 365 days This paper looked at various performance indicators of
a year, characterized by ever-growing trading volume, different segments of the Indian financial sector and
exhibits great heterogeneity among market participants indicated improvement in efficiency, competitiveness and
with big institutional investor buying and selling millions health of all the segments of the Indian financial sector.
of dollars and other currencies at one go to individuals
buying or selling less than 100 dollar. Indian foreign In the same period a study by (Ahluwalia M. S., 1994) on
exchange market is in nascent stage and if we look at the economic revolution of early 1990s, he has worked
Indian National Rupee (henceforth INR) contributes just on reviews the government's reforms in the tax, public,
0.5% in global FOREX market (BIS, 2008)in terms of financial, and industrial sectors, in trade and exchange
turnover. Rupee has depreciated to its lowest levels in policies. One of articles (Ahluwalia M. S., 1993) examines
the last decade and government's exogenous intervention the progress India has made toward macroeconomic
through monetary policy reviews have been to revive and stability after the budget figures presented by the then
stabilize Indian rupee and monitor volatility have been Finance Minister, presented to the Indian Parliament.
not much effective.
FOREX Market in India
Indian Financial Markets
Exchange Control Regimes have been studied as well to
India been a part of emerging economies as a part of understand this market. A study by Bhagwati (1978) for
BRICS has been studied by National & International understanding the a nato my a nd consequences of
scholars both academically and professionally. The study exchange control regimes was a descriptive study and a
(Tai, 2007) analyses effects between stock and foreign remarkable work for the late 1970's when exchange rate
exchange markets for each Asian country during the 1997 study as a topic was quite new to Indian Foreign exchange
Asian crisis. The empirical results show that first, both markets. The Indian Foreign Exchange Markets have gone
currency and world market risks are priced and time- through changes in exchange rate regime being called
varying. The efficiency factor of Indian markets (Mohan, as pre / post LERMS and the Equilibrium Real ExchangeAltius Shodh Journal of Management and Commerce ISSN 2348 – 8891
Rate of the Rupee was a new term introduced to keep implementation period (April 1973 to February 1993) and
the inflation pressures sustained with PPP. This study post implementation (March 1993 to March 2012) period
analyzed changes in the FOREX market in India & the indicates how volatility is impacted due to such policy
behavior of the rupee in the nineties when India moved changes.
from a fixed to a floating exchange rate. The analysis by
Patnaik & Pauly, 2001 attempts at an interventionist (G o y a l & A ro ra , 2 0 1 0 ) ex a m in ed the im pa c t o f
market structure to identify the underlying economic conventional monetary policy measures such as interest
forces that are submerged under. rates, intervention and other quantitative measures,
compared to central bank communication on the exchange
Many scholars tried to study the relation between stock rate level and volatility. In the Indian context, there is
markets and FOREX markets like Misra 2004. His studies hardly any study examining the Rupee movement wrt all
indicate that the exchange rate return affects the demand four currencies over a period of last ten years.
for money; the interest rate causes exchange rate return
change and the exchange rate return affects the stock Research Design:
return; the demand for money affects stock return, also
the interest rate affects the stock return. This was an Problem Statement: In recent few days, the Indian Rupee
important paper to have implications for investors, policy exchange rate movement has been a crucial issue for
makers and researchers. not only corporate houses but also the common man. As
from import of raw materials of all electronic goods, oil,
Rupee Depreciation auto-parts, bullion market, other machinery parts all
imports directly or indirectly get effected by the INR
Rupee depreciation and India's external trade and movements vis a vis most traded currencies which include
payments identify a new relationship between these two Pound, Yen and Euro. So the authors try to study over
variables. (Sarkar, 1992) This study casts some doubt the last decade the Indian rupee movement wrt hard
on the effectiveness of the current policy of devaluation currencies.
and depreciation under the LERM in solving India's trade
and payment deficits. Simple regression analysis confirms Scope of the Study:
that during the period 1971-90 the depreciation of the
rupee had no favorable effect on the dollar value and Reserve Bank of India reference rates are used for
exports. India follows now Real exchange rate and statistical analysis. The rupee behavioral pattern is
managed floating. A (Kohli, 2003) study on exchange rate studied with respect to most traded and convertible
policy in India, 1993-2001 examines the exchange rate currencies in Indian FOREX market including Pound
management objectives of the Indian central bank after Sterling, Euro and Japanese Yen.
the shift to a floating exchange rate regime in 1993 from
Type of Study and tools used:
fixed rate. In the last decade wherein we saw recession
as well across the globe we saw the rupee depreciating Analytical, empirical study and Statistical tools like Mean,
and weakening up to its lowest levels till 2012 wherein median, skewness, kurtosis and standard deviation is
the new RBI governor, Mr. Raghuram Rajan took over used.
and under the political and bureaucratic pressures could
not do much. But lately as inflationary pressures mounted Type of data:
up and changes took place in government, the RBI as a
regulatory body managed the floating float and now we Secondary Data is used. Reserve Bank of India reference
see INR movements being range bound in last months. rate is used.
The paper by (Baghestani, 1997) was testing the Sample Size:
empirical validity of INR and US Dollar with reference to
PPP. It examined in the presence of foreign exchange Daily observations for the time period 1st January 2004
black markets giving a different perspective to study. In to 31st March 2015 for all four hard currencies US Dollar,
a tri-variate model, the official exchange rate is found to Euro, Pound, Japanese Yen vis a vis INR.
be co-integrated with both the price ratio and the black
market exchange rate. It studied Indian managed float Hence, for one currency INR-US$ observations include
system and government intervention and how it aimed 2723, being daily observations. So for all four currencies
to stabilize domestic prices and reduce uncertainty about total daily observations are 10,892.
the dollar price of rupees. The analysis carried out for the data is in four
structural breaks as follows: (Table 1)
Research Gap and Review of Literature
Structural Break of Data –
S. No. Period Classification
A study (K & Shanmugasundaram, 2012) to measure the Time reference
impact of structural changes in exchange rate system of 1 1st Jan, 2004 to 31st Dec 2006 Pre-recession Scenario
st
India, from pegged exchange rate to the Liberalized 2 1st Jan, 2007 to 31 Dec 2009 Recession Scenario
Exchange Rate Management System (LERMS) in 1992 3 st
1st Jan, 2010 to 31 Dec 2012 Post-Recession Scenario
and market determinant exchange rate regime in 1993, 4 1st Jan, 2013 to 31st March 2015 Late Post-recession Scenario
on exchange rate volatility this study divide the entire
sample period in to two sub periods, namely preAltius Shodh Journal of Management and Commerce ISSN 2348 – 8891
Data Analysis and Interpretation: Graph2: Segment 2: Recession Scenario - 1st Jan, 2007
to 31st Dec 2009 (INR vs. USD, Pd., Yen, Euro)
Graph 1: Segment 1: Pre-recession Scenario - 1st
90
Jan, 2004 to 31st Dec 2006 (INR vs USD, Pd.,Yen,Euro) USDollar
PoundSterl ing
90
U SDol lar Euro
PoundSterl ing JapaneseYen
Euro
JapaneseYen 80
80
70
70
60
60
50
50
40
40
30
May Sep 2008 May S ep 2009 May Sep
30
May Sep 2005 May Sep 2006 May Sep
Table 2: Summary Statistics, using the observations Table3: Summary Statistics, using the observations
2004-01-01 - 2006-12-29 vis a vis INR 2007-01-02 - 2009-12-31 vis a vis INR
Variable Mean Median Minimum Maximum Variable Mean Median Minimum Maximum
US Dollar 44.9263 45.04 43.3 46.95 US Dollar 44.32 44.09 39.27 52.06
Pound Sterling 82.3149 82.6261 75.56 88.77 Pound Sterling 79.5896 80.08 67.6067 87.61
Euro 56.0799 56.375 51.84 59.9 Euro 62.5215 63.41 54.32 71.06
JapaneseYen 40.3321 40.34 36.91 43.79 Japanese Yen 42.9259 40.09 32.69 55.58
Variable Std. Dev. C.V. Skewness Ex. Kurtosis Variable Std. Dev. C.V. Skewness Ex. Kurtosis
US Dollar 0.988776 0.0220088 0.023173 -1.28277 US Dollar 3.80731 0.085905 0.164437 -1.4404
Pound Sterling 3.15925 0.0383801 -0.0626699 -0.956694 Pound Sterling 4.26269 0.0535584 -0.392503 -0.381302
Euro 2.1776 0.0388303 -0.0937229 -1.24656 Euro 5.10038 0.0815779 -0.103076 -1.48165
JapaneseYen 1.619 0.0401417 -0.0201671 -1.16987 Japanese Yen 7.60406 0.177144 0.229985 -1.63719
During the pre-recession scenario we observe,that the
mean USD-INR price ranged in the forties and was exactly In the years 2007-2009, during global recession, the
Rs 44.92. This indicates the range (Rs 46.95-Rs 43.30 volatilties of INR vis a vis all four currencies was high in
which is 3.65) based movement of Rupee wrt to Dollar, comparison to 2004-2006. During this period we see that
for almost a span of three years, whereas Pound Sterling the mean USD-INR price ranged again in the forties but
was quite volatile and indicated a range of (Rs88.77- with extreme ends of minimum Rs. 39.27 and maximun
Rs75.60 which is 13.21) and the median i.e. middle value being Rs. 52.06, showing a wide range (Rs 52.06-Rs
o f 7 34 obs erv ations w as 82 .62 . Euro pea n unio n 39.27which is 12.79) for a span of three years. If we
intergration and adoptiuon of common currency Euro look at the Pound Sterling, it was even more volatile and
strengthened this currency in comparison to INR. Euro indicated a range of (Rs. 87.61- Rs. 67.60) which is 20.00
followed a range of 8.06 which is also on higher side, and the median i.e. middle value of 721 observations
was 80.08. By this time Euro was settling down as unified
whereas the Japanese Yen followed a range of 6.88 in
currency across globe when hit by recession and mean
year 2004-06 which also indicated higher amount of
value for recession period was 62.52 indicating INR was
volatiltiy as in Table 1 above.
becoming weaker. Euro followed a range of 16.74 which
As a measure of volatiltiy we use standard deviation, is also on higher side indicating flucatuations amid the
skewness and Kurtosis. As we can see there is highest financial turmoil. Yen showed the highest volatility in a
range for pound and even result of standard deviation range of 22.89 in recession years 2007-09. To analyse
indicates that is highest standard deviation in case of volatiltiy we studied standard deviation which is also
Pound-INR. Where as in case of USD-INR we can see the highest in case of Yen (7.6) in the said period followed
range is lowest and hence the stadanrd deviation also by Euro with a SD value of 5.1. Pound Sterling and Euro
indicates lowest volatility. Other than USD all other three are negatively skewed and the kurtosis value not being
currencies are negatively skewed to indicate to normality around 3 indicates this time series data is not normally
graphs. distributed.Altius Shodh Journal of Management and Commerce ISSN 2348 – 8891
Graph3: Segment 3: Post-recession Scenario - 1st Graph4: Segment 4: Late Post-recession Scenario - 1st
Jan, 2010 to 31st Dec 2012 (INR vs USD, Pd.,Yen,Euro) Jan, 2013 to 31st March 2015
90 110
USDollar USDol lar
Pou nd Ste r lin g PoundSterl ing
Euro Euro
85 Japa ne seY e n JapaneseYen
100
80
75
90
70
65
80
60
55
70
50
45 60
40
Ma y Se p 20 1 1 M ay Se p 20 12 M ay Sep
50
Mar May Jul Sep Nov 2014 Mar May Jul Sep Nov 2015 Mar
Table4: Summary Statistics, using the observations
2010-01-01 - 2012-12-31 vis a vis INR Table 5: Summary Statistics, using the observations
2013-01-01 - 2015-03-30 vis a vis INR
Variable Mean Median Minimum Maximum Variable Mean Median Minimum Maximum
US Dollar 48.6239 46.645 43.9485 57.2165 US Dollar 60.0748 61.1046 52.973 68.3611
Pound Sterling 95.9221 98.6815 80.8376 106.028
Pound Sterling 76.701 73.6644 65.6471 89.5368
Euro 78.4885 78.9536 65.9451 91.4682
Euro 64.6959 64.6441 56.07 72.773
Japanese Yen 58.2214 58.83 50.98 70.25
Japanese Yen 59.2961 55.905 46.93 72.12
Variable Std. Dev. C.V. Skewness Ex. kurtosis
Variable Std. Dev. C.V. Skewness Ex. Kurtosis
US Dollar 3.06343 0.0509935 -0.863606 -0.0235705
US Dollar 4.05861 0.0834695 0.626441 -1.16273
Pound Sterling 6.74975 0.070367 -0.849301 -0.59831
Pound Sterling 6.71216 0.0875108 0.51849 -1.13408
Euro 5.62814 0.0717065 -0.338983 -1.11521
Euro 4.07344 0.062963 -0.0710526 -1.01096 Japanese Yen 3.68396 0.0632749 -0.0669827 -0.380956
Japanese Yen 7.11173 0.119936 0.245533 -1.31413
After global recession, recovery had started across all
financial markets and market confidence had regained
In the post-recession scenario we find out,that the mean in last three years but change in Indian political regime
and median USD-INR price ranged in the fortiess still and RBI intervention for dirty float through the new RBI
and was exactly Rs 48.62 and Rs 46.64 respectively and Governor changed the situation in period of 2013, 2014
and further on. Here in only 540 observations are
range 13.26. Pound Sterling was again very volatile and
considered as all other periods correspond to Jan-Dec
indicated a range of 23.88 with maximum and minimum cycle but here only first quarter data of 2015 is used for
values being Rs. 89.5 and Rs. 65.64 respectively. The study. The mean USD-INR price is Rs 60.07 and median
total 728 daily observations for this period indicate Euro being 61.1. This was the period where Rupee depreciated
mean value was 64.69. The Japanese Yen movements to a maximum level of Rs 68.36. This was first time in
have been astonishingly always showing very high last decade that rupee had range bound movement in
sixties. Again a wide range of INR-USD was 15.38 which
fluctuation in maximum and minimum values, being 72.12
was least in comparison to the other three currencies.
and 46.93 respectively. its range being 25.19 is the If we look at Pound Sterling, it indicated a range of 25.19
higheest amongst all other currencies as shown in Table and mean value being as high as 95.92 and median being
4. 98.68. The Euro was also very much volatile with respect
to INR and fluctuated within a range of 25.52 which is
To measure of volatiltiy we see standard deviation, and also highest amongst all currencies. This period showed
we observe that it is highest range for Yen price some settling period in comparison to previous years'
fluctuations and even the result of standard deviation flucations but still it was in a high range of 19.27.
indicates that its highest standard deviation in case of To understand volatiltiy we observe standard deviation
Yen-INR with 7.11 being followed by Pound-INR currency which is also highest in case of Pound - 6.75 followed by
pair. Only Euro is negatively skewed and very close ot Euro with 5.6. Yen is more normally distributed data in
value zero indicating normal distribution of time series comparison to others and is all currencies are negatively
data in comparison to ther currencies. skewed.Altius Shodh Journal of Management and Commerce ISSN 2348 – 8891
Conclusion: 4. Ahluwalia, M. S. (1994). India's quiet economic
revolution. The Columbia Journal of World Business,
During the pre-recession scenario (period 2004-2006) 29 (1), 6-12.
USD-INR is least volatile and Pound-INR being highest
volatile. Yen was highest volatile in a range of 22.89 in 5. K. S., & Shanmugasundaram, G. (2012). Foreign
recession years 2007-09 which also indicated highest Exchange Rate Volatility of Indian Rupee/US Dollar.
amount of volatiltiy and in terms of volatility the standard XI Capital Markets Conference, Indian Institute of
deviation is also highest in case of Yen has 7.6 in the Capital Markets (pp. 1-13). Navi Mumbai: Indian
said period followed by Euro with a value of 5.1. In post- Institute of Capital Markets.
recession scenario USD was still in range of forties and
had touched maximum value of Rs 57.21. We observe 6. Mishra, A. K. (2004). Stock Market and Foreign
there is highest range for Yen price fluctuations and even Exchange Market in India: Are they Related? South
result of standard deviation indicates that is highest Asia Economic Journal , 5 (2), 209-232.
standard deviation in case of Yen-INR with 7.11 being
7. Patnaik, I., & Pauly, P. (2001). The Indian Foreign
followed by Pound-INR currency pair 6.7 in period 2010-
Exchange Market and the Equilibrium Real Exchange
2012 which is post recession scenario. In late post-
Rate of the Rupee. Global Business Review , 2 (2),
recession scenario we can see that post 2013 the mean
195-212.
USD-I NR price is R s 6 0.0 7 a nd Rupee ex tremely
depreciated to a maximum price of Rs 68.36. This was 8. Sarkar, P. (1992). Rupee Depreciation and India's
first time in last decade that rupee had range bound External Trade and Payments since 1971. Economic
movement in sixties and it even touched a high figure of and Political Weekly , 27 (24/25), 1259-1266.
Rs 68.36. Pound Sterling crossed hundred mark and
touched 106 and also showed highest volatality with 9. Bhagwati, J. N. (1978). Anatomy and Consequences
highest standard deviation of 6.74. of Exchange Control Regimes. In J. N. Bhagwati, &
N B ER ( Ed.), Fo re ign Tra deRe gim es
Limitations and further Scope for Study: andEconomicDevelopment: ASpecialConference
Series onForeignTra deRegimes and Econom ic
Limitation of study is that the exchange rate data is daily
Development (pp. 8-205). Cambridge, Masachuset:
data which is highly volatile at the pips (fourth decimal
NBER BaIinger Publishing Company.
place). Hence the movements are very small and hence
volatility cannot be calculated by simple statistical 10. Goyal, A., & Arora, S. (2010). The Indian Exchange
methods. It needs stochastic, stationality study of time Rate and Central Bank Action: A GARCH. Mumbai:
series for the data to be further pursued. Indira Gandhi Institute of Development Research,
Mumbai.
Bibliography and References:
11. Baghestani, H. (1997). Purchasing power parity in
1. Tai, C.-S. (2007). Market integration and contagion: the presence of foreign exchange black markets:
Evidence from Asian emerging stock and foreign The case of India. Applied Economics , 29 (9), 1147-
exchange markets. Emerging Markets Review , 8 1154.
(4), 264-283.
12. www.rbi.org.in
2. Ahluwalia, M. S. (1993, June 1). Speeches Archives
. Retrieved July 19, 2014, from Planning Commission 13. www.bis.org
of India: http://www.planningcommission.gov.in/
hindi/aboutus/speech/spemsa/msa012.pdf 14. swww.nseindia.com
3. Mohan, R. (2005). Financial Sector Reforms in 15. www.fedai.org.in
India: Policies and Performance Analysis. Money,
Banking and Finance Vol. 40, No. 12, , 40 (12), 1106-
1112+1115-1121 .You can also read
