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Modeling exchange rate dynamics in India using stock market indices and macroeconomic variables

  • Sinha, Pankaj
  • Kohli, Deepti

Predicting currency movements is perhaps one of the hardest exercises in economics as it has many variables affecting its market movement. This study concerns with some of the usual macroeconomic variables which, in theory, are expected to affect the exchange rate between two countries. Indian Rupee is currently losing its value to the Dollar which could certainly be seen to affect the Indian economy adversely. This paper attempts to investigate the interactions between the foreign exchange and stock market in India as well as determine some of the economic factors which could have influenced the Indian rupee vis-à-vis the US Dollar over the period 1990-2011. This paper studies the effect of exchange rate on three market indices; BSE Sensex index, BSE IT sector index and BSE Oil & Gas sector index for the period January 2006 to March 2012. No significant interactions were found between foreign exchange rate [USD/INR] and stock returns. Economic variables like inflation differential, lending interest rates and current account deficit (as a percentage of GDP) are found to significantly affect the exchange rate [USD/INR]. This study also analyzes how the real GDP of India is currently behaving with respect to the exchange rate. It is found that they share a negative relationship which is highly statistically significant

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45816.

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Date of creation: 15 Jan 2013
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Handle: RePEc:pra:mprapa:45816
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  1. Giovannini, Alberto & Jorion, Philippe, 1987. "Interest rates and risk premia in the stock market and in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 107-123, March.
  2. Douglas McMillin, W. & Koray, Faik, 1990. "Does government debt affect the exchange rate? An empirical analysis of the U.S.--Canadian exchange rate," Journal of Economics and Business, Elsevier, vol. 42(4), pages 279-288, November.
  3. Hatemi-J, Abdulnasser & Irandoust, Manuchehr, 2002. "On the Causality between Exchange Rates and Stock Prices: A Note," Bulletin of Economic Research, Wiley Blackwell, vol. 54(2), pages 197-203, April.
  4. Phylaktis, Kate & Ravazzolo, Fabiola, 2005. "Stock prices and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1031-1053, November.
  5. Anca Elena Nucu, 2011. "The Relationship between Exchange Rate and Key Macroeconomic Indicators. Case Study: Romania," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 14(41), pages 127-145, September.
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