Internationalising India: Performance & Potential

Exchange Rate VolatilityGroup A052014010 Devendra Prabhudesai 2014012 Divya Gupta 2014026 Manali Paralikar2014029 Mayank Kalia2014030 Mohit Tripathi2014057 Sudarshan Kumar2014058 Suhas Shinde

Objective & MotivationObjectiveTo study the factors that affect the exchange rate volatility

MotivationIn 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$ debtHowever ,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, 2015The determinants of exchange rate volatility are of interest because of the exchange rates potential linkages to other economic variablesLiterature ReviewREER- Real Effective Exchange RateIts 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

MethodologyTo 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 OData SourcesEconomic Times: Considerable capital flow, volatile Rupee to keep RBI Governor Raghuram Rajan on edgeEvolution of Indias exchange rate regime, Ashima Goyalhttp://data.worldbank.orghttp://dbie.rbi.org.in/DBIE/dbie.rbi?site=statisticsExcel Data

Thank you!!DataMonth/ Year/ Base YearNEERREERGold Price (INR)Crude Oil Price ($)Foreign Exchange Reserves (Rs. Billion)Jan-9598.69105.4511876.4416.88743.54Feb-9598.14104.7411818.1717.44752.9Mar-9598.91104.3212093.9317.35797.8Apr-9595.26101.9712283.8218.77784.5May-9595.87102.7112102.118.43769.91Jun-9595.69102.6112170.0917.33758.98Jul-9595.72103.6712119.3516.06763.76Aug-9596.73104.512120.1416.49748.12Sep-9592.6499.8312741.5316.77796.68Oct-9588.4595.4313241.716.18769.7Nov-9588.1795.1313388.4216.82759.52Dec-9588.1794.4913544.7117.93775.19Jan-9686.7692.4714286.817.79762.25Feb-9684.7690.0514818.6917.69724.09Mar-9691.5498.1913647.5519.46743.84Apr-9691.597.613450.9920.78744.81May-9689.8996.2213713.8319.12759.88Jun-9689.9496.6713480.3918.56774.31Jul-9688.2396.1613622.9519.56800.99Aug-9687.5895.8113825.2620.19800.44Sep-9687.8396.0913689.9822.14818.76Oct-9688.4496.3613582.2923.43842.73Nov-9687.7395.6313502.9722.25848.8Dec-9688.2396.3513224.3423.51866.83Jan-9789.289712738.6423.29860.1Feb-9791.0598.9312438.2420.54849.88Mar-9789.2796.8312619.2419.42949.32Apr-9792.08100.812338.5917.98953.6May-9791.6499.8912314.9419.471005.4Jun-9791.73100.2612202.7818.021050.49Jul-9793.11101.7511582.0718.451063.35Aug-9794.25102.9811640.3818.791097.42Sep-9793.09102.2311755.5718.731065.05Oct-9793.63102.9711769.8920.121092.47Nov-9791.47100.2411370.1919.161076.02Dec-9789.3898.0511324.7917.241072.95Jan-9891.84101.1911378.2515.071082.94Feb-9891.83100.3111576.2314.181079.58Mar-9892.04100.7711690.8413.241159.05Apr-9892.3695.8612225.0213.391169.93May-9890.9995.0112075.2413.971189.68Jun-9888.3793.1612349.8612.481150.01Jul-9888.0993.4212450.0312.721152.38Aug-9887.8592.5812142.7312.491186.76Sep-9887.9791.8512287.6913.81241.16Oct-9886.2890.6112531.1613.261260.73Nov-9886.6791.212463.9711.881266.01Dec-9886.5690.4212412.1810.411278.54Jan-9989.8292.6512203.211.321293.34Feb-9991.1694.3112203.0610.751307.2Mar-9989.0593.0412135.1912.861380.05Apr-9991.7595.7212075.2515.731393.28May-9991.8696.0111823.616.121434.05Jun-9991.595.9211272.216.241442.38Jul-9991.3195.9111084.7718.751446.89Aug-9990.0795.0111155.9820.211446.56Sep-9990.1495.2711526.322.371448.01Oct-9989.4295.2313502.0922.191467.82Nov-9990.4896.3612723.3924.221491.55Dec-9990.7395.7112309.2425.011519.43Jan-0090.5995.2512382.6825.211522.83Feb-0091.9196.5813077.7527.151565.7Mar-0091.0295.9912483.3327.491659.13Apr-0093.61100.7212205.3923.451654.54May-0094.7101.7212100.2327.231660.38Jun-0092.0498.9512769.5529.621641.12Jul-0092.3399.3912609.0628.161630.02Aug-0091.3398.312541.0329.411631.34Sep-0092.3499.7112558.932.081632.6Oct-0092.25101.412515.5331.41633.27Nov-0091.76100.8712444.5532.331828.59Dec-0090.8899.8712690.4425.281873.58Jan-0190.6199.4612355.925.951908.35Feb-0191.3699.9712181.927.241939.38Mar-0192.12100.0912262.5925.021972.04Apr-0192.48101.9312186.7925.661992.76May-0192.51101.8412778.3927.552020.15Jun-0193.14102.6112702.2326.972044.09Jul-0192.88102.612611.8524.82062.36Aug-0191.25101.1512836.7425.812138.65Sep-0189.9699.2913503.8325.032147.81Oct-0189.9599.7613592.6820.732170.92Nov-0190.65100.4813254.9518.692250.3Dec-0191.26100.7113217.9218.522318.07Jan-0291.399.8513606.9919.152403.71Feb-0291.2899.3514388.3419.982478.4Mar-0291.58100.8614332.3223.642640.36Apr-0291.8299.8614806.9525.432735.93May-0290.3698.2315410.0125.692783.89Jun-0289.1897.9515725.3324.492868.3Jul-0288.1997.2115277.2525.752950.4Aug-0289.1298.8715075.6926.783014.41Sep-0289.599.1215459.528.283077.88Oct-0289.9399.4315311.8327.533154.34Nov-0289.3198.7115396.8124.793261.97Dec-0288.6797.4315977.827.893415.41Jan-0387.6496.2817104.2530.773549.45Feb-0387.7596.9817135.7232.883506Mar-0389.1298.1816224.1630.363614.7Apr-0387.7499.2115548.3525.493708.71May-0385.9797.5116746.6826.063871Jun-0386.3598.0416649.1227.913867.24Jul-0388.0499.8716229.2528.593947.35Aug-0389.39101.3316526.1229.684003Sep-0388.85101.517374.8126.884233.7Oct-0388.12100.8517199.3529.014251.17Nov-0387.56100.5217748.729.124474.54Dec-0385.8998.3118553.3829.954704.72Jan-0485.2698.3518806.2531.44820.25Feb-0485.4598.9718329.531.324959.28Mar-0487.1499.5618306.0233.674901.29Apr-0490.43101.4317716.5633.715257.41May-0488.6699.6317362.9737.635438.86Jun-0487.6299.8617859.2135.545495.08Jul-0486.2198.8918329.5637.935498.97Aug-0486.0399.5418560.5942.085475.31Sep-0486.52100.4618682.4141.655519.76Oct-0486.1599.3619250.3946.875514.75Nov-0485.7599.4619821.1842.235738.12Dec-0486.92100.0319442.8339.095716.78Jan-0587.55100.6818554.2142.895656.26Feb-0588.2101.1518490.6644.565930.64Mar-0587.31100.0918954.9150.936191.16Apr-0588.97100.5718775.1650.646191.36May-0590.03102.0718347.8647.816066.67Jun-0591.24103.718770.5853.896020.48Jul-0592.07105.0218480.756.376112.19Aug-0590.95104.0119105.0961.876345.27Sep-0590.38103.9120028.0361.656293.15Oct-0589.42102.542106258.196476.65Nov-0588.3101.3721796.0854.986561.19Dec-0588.06100.5923290.0656.476183.83Jan-0689.41101.4724413.1462.366186.27Feb-0689.88101.7424603.5159.716328.26Mar-0689.85102.3524776.9960.936763.87Apr-0687.7398.1627448.49687225.63May-0685.4396.4330668.9868.617608.42Jun-0685.1196.627455.7368.297507Jul-0684.2295.7529439.7572.517654.45Aug-0683.6195.6429440.371.817738.69Sep-0684.659827588.9161.977597.47Oct-0686.1899.9626634.4957.957536.03Nov-0686.5100.3528162.4458.137816.9Dec-0685.8999.1428110.41617839.82Jan-0787.05100.6927985.5753.47957.75Feb-0787.21100.5529356.757.588621.1Mar-0787.11100.5328832.0860.68682.22Apr-07102.38106.5528636.0865.18440.01May-07105.6109.7427220.9165.18474.63Jun-07105.9109.8826726.0168.198694.49Jul-07105.77110.0926892.2473.679184.19Aug-07105.26109.5127160.4970.139373.62Sep-07105.58109.5928748.4276.919846.04Oct-07106.29110.0329816.882.1510407.7Nov-07105.18108.831798.4291.2710850.56Dec-07105.63108.7531678.3389.4310850.2Jan-08105.2107.6835025.7890.8211550.72Feb-08103.86106.836642.4693.7512025.31Mar-08100.4104.8639082.77101.8412379.65Apr-08101.08105.5436416109.0512710.72May-0896.5100.4737435.38122.7713399.43Jun-0895100.7138087.88131.5213404.17Jul-0894.36100.4740256.56132.5513009.47Aug-0896.04102.4336026.85114.5712931.57Sep-0892.5798.2637815.0299.2913440.61Oct-0890.1595.8239235.7972.6912454.44Nov-0891.6996.6437284.8254.0412344.6Dec-0890.8894.4239696.2741.5312401.61Jan-0990.5793.6541938.4243.9112186.92Feb-0992.2794.2146416.5541.7612645.89Mar-0988.9490.947387.4846.9512838.65Apr-0989.6590.6944573.3650.2812640.48May-0990.5991.9845070.8658.112404.41Jun-0991.0492.8745178.0969.1312692.35Jul-0989.5992.2445317.2864.6513082.2Aug-0989.3392.7245872.871.6313552.09Sep-0988.3592.0648273.8268.3813512.58Oct-0990.6694.7848737.4974.0813355.02Nov-0990.6796.1552484.9477.5613393.03Dec-0991.196.7852912.1874.8813232.35Jan-1092.639951344.5177.1213027.93Feb-1093.0899.0350745.8774.7212868.48Mar-1094.56101.0850654.6179.312596.65Apr-1096.35103.8151115.4184.1412426.91May-1095.55103.0455173.3575.5412706.1Jun-1094.66102.557410.3674.7312848.07Jul-1092.03100.1855916.8374.5213203.1Aug-1092.0299.7956616.0275.8813330.33Sep-1092.87101.1158511.7776.1113155.74Oct-1094.51102.6459609.3581.7213270.97Nov-1093.34101.6461476.4584.5313461.6Dec-1093.82103.2162809.8290.0713323.53Jan-1192.72103.2761559.1492.6613749.36

RegressionSUMMARY OUTPUT

Regression StatisticsMultiple R0.5275020685R Square0.2782584322Adjusted R Square0.2668022169Standard Error3.5152987411Observations193ANOVAdfSSMSFSignificance FRegression3900.4360966766300.145365558924.28886184950Residual1892335.534470162712.357325239Total1923235.9705668394

CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept97.32429190670.7201760958135.1395755484095.903676084198.744907729495.903676084198.7449077294Gold Price (INR)-0.00012932520.0000590254-2.19101039790.0297-0.0002457584-0.000012892-0.0002457584-0.000012892Crude Oil Price ($)0.15331484760.02323665516.597974060.00000.10747833610.19915135910.10747833610.1991513591Foreign Exchange Reserves (Rs. Billion)-0.00028891740.0002471784-1.16886198860.2439-0.00077650020.0001986654-0.00077650020.0001986654