INTERRELATION BETWEEN INDIAN RUPEES, DOLLAR, EURO,

POUND AND YEN

INTRODUCTION:
Foreign exchange market:
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-
the-counter market for the trading of currencies. This market determines foreign exchange rates
for every currency. It includes all aspects of buying, selling and exchanging currencies at current
or determined prices.
What is exchange rate?
In finance, an exchange rate is the rate at which one currency will be exchanged for another
currency.
What is correlation in forex trading?
A foreign exchange correlation is the connection between two currency pairs. There is a positive
correlation when two pairs move in the same direction, a negative correlation when they move in
opposite directions, and no correlation if the pairs move randomly with no detectable relationship.

Exchange rates play a vital role in a country's level of trade, which is critical to almost every free
market economy in the world today. Therefore, exchange rates are among the most monitored,
analyzed and governmentally manipulated economic measures. Exchange rate matters not just on
the big macroeconomic scene but also on a smaller one. It impacts the real return of an investor's
portfolio, profitability of firms, growth of specific sectors amongst various other determinants of
the economy.
The Indian rupee, which was on a par with the American currency at the time of Independence in
1947, has depreciated by a little more than 68 times against the greenback in the past 67 years.
This volatility became severe in the past few years affecting major macro-economic data, including
growth, inflation, trade and investment. Through this study, we aim at exploring the dynamics of
exchange rate mechanism, the Rupee’s journey against dollar since 1993, factors influencing the
fluctuation of Indian Rupee and finally modelling the exchange rate through multivariable
regression analysis (OLS). We use quarterly data of US Dollar-Indian Rupee exchange rate.
Abstract
Economic assimilation in between world economies has been advancing rapidly, driven by
growing intra-regional trade, increasing investment and financial integration. Recent discussions
on regional and bilateral free-trade agreements and on emerging financial cooperation
arrangements make this process likely to deepen over time resulting the business cycles across
economies in the world more interrelated. The Behaviour of Exchange Rate (ER) movements
among economies does reflect how deepen the assimilation is.
Thus, this study attempts to investigate the extent to which international ERs move together. The
ER co-movement is measured between Indian Rupees, Japan Yen, Sterling Pound, US Dollar and
EURO by taking Sri Lankan Rupees as the base currency. Econometric models of Autoregressive
Conditional Heteroskedasticity (ARCH), Generalized ARCH (GARCH), Johansen Cointegration
Test, Vector Autoregression (VAR) and VAR Variance Decompositions are employed. Monthly
ERs over the period from 2007 to 2010 (48 months) were used for the investigation.
The empirical results indicate that ER co-movement is significant since most of the considered
ERs depict more than 46% of their forecast error variance is explained by the other ERs under
study while Japan Yen depicts only 37%. There is a high degree of co-movement between ER
against Sterling Pound and with that of Japan Yen, US Dollar, Indian Rupees and EURO, stood
in declining order of ER co-movement respectively. Japan Yen showed a negative response for
all the chocks given to other ERs while the response of Sterling Pound is persistent to the shocks
of Indian Rupees.
Exchange Rate of the Indian Rupee with the USD, EUR, GBP and JPY
(The data on exchange rate for Japanese Yen is in 1 rupee per 100 Yen)

Year USD EUR GBP JPY

1985–86 12.2349 4.5553 16.8467 5.6200
1990–91 17.9428 11.4351 33.1930 12.7900
1995–96 33.4498 23.3993 52.3526 34.8425
2000–01 45.6844 41.4832 67.5522 41.4052
2005–06 44.2735 53.9124 79.0472 39.1438
2010–11 45.5768 60.2181 70.8853 53.2963
2015–16 65.4685 54.5934 98.7260 72.2894
2018–19 69.9229 63.0468 91.7865 80.9580
2019-20 74.1322 84.6484 95.124 68.7855
2020-21 73.6624 87.9554 101.9214 67.7600