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

Pankaj Sinha and Deepti Kohli

MPRA Paper from University Library of Munich, Germany

Abstract: 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

Keywords: current account deficit as a percentage of GDP; exchange rate; GDP; inflation differential; IT; lending interest rates; Oil & Gas; public debt; stock price index; Sensex (search for similar items in EconPapers)
JEL-codes: E6 F31 F37 (search for similar items in EconPapers)
Date: 2013-01-15
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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