An Empirical Investigation on the Relationship between Onshore and Offshore Indian Rupee Market
Abstract
Exchange rate movements have important ramifications for the economy’s business cycle, trade and capital flows. For India, the exchange rates fluctuations have consequences for being competitive in terms of international trade and capital flows, tourist destination and for maintaining a healthy international reserve. This paper attempts to explore the relationship between rupee-dollar exchange rate in spot market, domestic forward market and off-shore forward i.e. non-delivery forward market (Singapore) to understand the information flow in between these markets. Suitable econometric techniques including causality analysis was used for the study for the period 2002 to 2014 after considering structural breaks and sub period analysis was also done. It was found that the relationship between all three markets is quite dynamic with evidences of causality in one sub period and reverse direction or no causality in other sub periods, conditional upon intervention done by RBI to curb the volatility and on various macroeconomic shocks such global financial crisis.
Downloads
References
Case, K. E., Quigley, J. M., & Shiller, R. J. (2005). Comparing wealth effects: the stock market versus the housing market. Advances in macroeconomics, 5(1), 1-34.
Cheng, X., He, D., & Shu, C. (2015). One currency, two markets: the Renminbi’s growing influence in Asia-Pacific. China Economic Review, 33, 163-178. doi: https://doi.org/10.1016/j.chieco.2015.01.013
Colavecchio, R., & Funke, M. (2008). Volatility transmissions between renminbi and Asia-Pacific on-shore and off-shore US dollar futures. China economic review, 19(4), 635-648.
Darbha, Gangadhar (2012), “A Tale of One Asset and Two Markets – Analysis of Dynamic Interactions between On- and Off Shore Markets”, available at: macrofinance.nipfp.org.in/PDF/13-11sl_Darbha_NDFNimrana.pdf
Ehlers, T. & Packer, F. (2013). FX and derivatives market in emerging economies and the internationalization of their currencies. Bank for International settlements (BIS) Quarterly Review, December 2013, 55-67
Engle, R. F., & Kroner, K. F. (1995). Multivariate simultaneous generalized ARCH. Econometric theory, 11(1), 122-150.
Goyal, R., Jain, R., & Tewari, S. (2013). Non deliverable forward and onshore Indian rupee market: a study on inter- linkages. Reserve Bank of India working paper series, 11: 1-15.
Guru, A. (2009). Non-Deliverable Forwards Markets for Indian Rupee: An Emprical Study. Indian Journal of Economics and Business, 8(2),245-260.
Hutchison, M., Sengupta, R., & Singh, N. (2012). India’s trilemma: financial liberalisation, exchange rates and monetary policy. The World Economy, 35(1), 3-18.
Kai-Li, W., Christopher, F., & Mei-Ling, C. (2007). Information Flows among Exchange Rate Markets: What Do We Learn From Non-Deliverable Forward Markets in Asia?. Chaoyang University of Technology, October, available at http://www.cyut.edu.tw/~ finance/docs/1030-2. pdf.
Ludwig, & A., Slok, T. (2004). The relationship between stock prices, house prices and consumption in OECD countries. The B.E. Journal of Macroeconomics, 4(1), 1-28.
Lutkepohl, H. (2006). New Introduction to multiple Time Series Analysis. Springer Science & Business Media. Berlin.
Ma, G., Ho, C., & McCauley, R. (2004). The markets for non-deliverable forwards in Asian currencies, BIS Quarterly Review, (June 2004) 81-94
Misra, S., & Behera, H. (2006). Non deliverable foreign exchange forward market: An overview. Reserve Bank of India Occasional Papers, 27(3), 25-55.
Park, J. (2001). Information flows between non-deliverable forward (NDF) and spot markets: Evidence from Korean currency. Pacific-Basin Finance Journal, 9(4), 363-377.
Park, Y. C., & Song, C. Y. (2011). Renminbi internationalization: prospects and implications for economic integration in East Asia. Asian Economic Papers, 10(3), 42-72.
Pedroni, P. (2004). Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric theory, 20(3), 597-625.
Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possible integrated processes. Journal of Econometrics, 66(1-2), 225-250
Wang, K., Fawson, C., & Chen, M. (2006). The dynamic structure of exchange rates: A general MGARCH-X MSKST model application. In Proceeding of Business and Information conference.
JQM follows an open-access publishing policy and full text of all published articles is available free, immediately upon publication of an issue. The journal’s contents are published and distributed under the terms of the Creative Commons Attribution 4.0 International (CC-BY 4.0) license. Thus, the work submitted to the journal implies that it is original, unpublished work of the authors (neither published previously nor accepted/under consideration for publication elsewhere). On acceptance of a manuscript for publication, a corresponding author on the behalf of all co-authors of the manuscript will sign and submit a completed Copyright and Author Consent Form.