Exchange Rate Volatility

Group A05
2014010 Devendra Prabhudesai
2014012 Divya Gupta
2014026 Manali Paralikar
2014029 Mayank Kalia
2014030 Mohit Tripathi
2014057 Sudarshan Kumar
2014058 Suhas Shinde

Objective & Motivation

Objective

To study the factors that affect the exchange rate volatility

Motivation

In 2015, India received US$2.2 billion from FIIs in debt and equity. This
led to arupeegain of 2% in relation to the US$.

Appreciation can be a boon to over-leveraged companies with US$ debt

However ,it could be a hurdle for India to become a manufacturing power

house.
Considerable capital flow, volatile Rupee to keep RBI Governor Raghuram Rajan on edge Gayatri Nayak & MC Govardhana Rangan, ET BureauJan 21,
2015

The determinants of exchange rate volatility are of interest because of

the exchange rates potential linkages to other economic variables

Literature Review
REER- Real Effective Exchange Rate

Its the weighted average of a country's currency relative to an index or basket of

other major currencies adjusted for the effects of inflation.

The weights are determined by comparing the relative trade balances, in terms of
one country's currency, with each other country within the index.

A currency is considered to be valued fairly if the REER Index is close to 100. India's
long-term REER (six currency Index) average has largely remained close to 105

Why REER over NEER?

REER is an advancement of NEER. REER is calculated by multiplying NEER with the

effective relative price indices of trading partners.

Determinants

Gold price, Crude oil price, Foreign and Exchange Reserves significantly affect the
value of Indian Rupee against US dollar.

In this study we are trying to establish a similar relationship of these factors with
REER

Methodology

To make use of multiple linear regression to determine the relationship

of REER with Gold Prices, Crude Oil Prices, and Foreign Exchange
Reserves.

Hypothesis:
H0: Indian REER is not dependent on Gold Price (G)
H0: Indian REER is not dependent on Crude Oil Price(O)
H0: Indian REER is not dependent on Level of Foreign Exchange
Reserves(FE)
Based on above hypothesis, we have estimated following equation:
REER= 97.32 0.00012 G + 0.153 O

Data Sources

Economic Times: Considerable capital flow, volatile Rupee to keep RBI

Governor Raghuram Rajan on edge

Evolution of Indias exchange rate regime, Ashima Goyal

http://data.worldbank.org

http://dbie.rbi.org.in/DBIE/dbie.rbi?site=statistics

Excel Data
Microsoft Office
Excel Worksheet

Thank you!!