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A study on
Relationship
between
RBI Rupee Dollar Rates
and
Trade Deficit, CAD & Net FII
Niraj Shrivastava
Ravi Sondhi
Focus of Presentation
� Rupee Dollar fluctuation- Graphical
� Relationship of Rupee-Dollar rate with FII, CAD , Trade balance and Foreign
Reserves- Graphical Analysis/ Surface level
� Performing Correlation on Rupee Dollar rate with FII, Trade balance and
Foreign reserves variables.Foreign reserves variables.
� Understand & identifying Co-movement or long term relationship of Rupee
Dollar rate with FII, Trade balance
� Indentifying the Short term casual relationship between Rupee Dollar rate , FII
, CAD and trade balance.
Framework & Tools Used
� Data Source from Indianstat.com and RBI website
� Graphical Comparison- Primary Analysis
� Co-integration & VAR Framework� Co-integration & VAR Framework
� Regression/ Correlation
� Eviews software.
Historical Movement of Rupee
Focus Area
� Dynamic movement on Rupee post Global Financial Crisis affecting
Indian Economy
Rupee Dollar Rate & FII, CAD- Graphical Representation
2,00,000
1,50,000
1,00,000
50,000
0
50,000
1,00,000
1,50,000
61.00
61.50
62.00
62.50
63.00
63.50
64.00
Rupee Dollar rate - CAD , FII , Trade balance and Foreign Ex. Reserves
3,50,000
3,00,000
2,50,000
60.00
60.50
61.00
Jun
-99
No
v-9
9
Ap
r-0
0
Se
p-0
0
Fe
b-0
1
Jul-
01
De
c-0
1
Ma
y-0
2
Oct
-02
Ma
r-0
3
Au
g-0
3
Jan
-04
Jun
-04
No
v-0
4
Ap
r-0
5
Se
p-0
5
Fe
b-0
6
Jul-
06
De
c-0
6
Ma
y-0
7
Oct
-07
Ma
r-0
8
Au
g-0
8
Jan
-09
Jun
-09
No
v-0
9
Ap
r-1
0
Se
p-1
0
Fe
b-1
1
Jul-
11
De
c-1
1
Ma
y-1
2
Oct
-12
Ma
r-1
3
Au
g-1
3
Jan
-14
Jun
-14
No
v-1
4
Rupee Dollar FII Trade Balance CAD Reserves
Primary Analysis:-
� Trade balance and CAD are moving in tandem / parallel.
� FII and Foreign Exchange reserves are moving in opposite direction not relationship with Trade
balance & CAD.
• Variation shows the increasing/widening trend from 2000 to 2014.
Source: Indiastat.com
Correlation of Indian Rupee Dollar – FII, CAD, Trade Balance
& Foreign Ex. Reserves
Analysis Results - Eviews
Ind. Variables t- stat prob. Acceptance prob. Co-efficient t- stat prob. Acceptance prob. Co-efficient
C 0.00 <=0.05 62.14 C 0.00 <=0.05 62.15
CAD 0.55 <=0.05 -1.85E-06 CAD 0.00 <=0.05 9.06E-06
Trade balance 0.02 <=0.05 8.42E-06 Trade balance 0.00 <=0.05 -3.40E-06
FII 0.02 <=0.05 -3.45E-06
Foreign Ex. Reserves 0.70 <=0.05 -8.36E-07
Dep. Variable ( Indian Rupee Dollar Rate)- Removing FII & Foreign Ex. ReservesDep. Variable ( Indian Rupee Dollar Rate)
Rupee Dollar Rate t = c + β1 FII + β2 CAD + β3 Trade balance + β4 Foreign ex. Reserves
where :-Probability of t-stat - x1, x2, x3, x4 <= 5%
� There exist the Correlation of Indian Rupee dollar rate with CAD and Trade
balance.
� F-stat, DW shows model is relevant & okay.
� There seems the problem of Multi-Collinearity in Trade Balance.
� R-square is less due to less data points which can be overcome if time span is
increased.
Interpretation
Foreign Ex. Reserves 0.70 <=0.05 -8.36E-07
F -stat 0.047 <=0.05 F -stat 0.01 <=0.05
DW 0.361 <=2 DW 0.361 <=2Model OK Model OK
Co-integration
� Cointegration can be defined as a systemic co-movement among two or more
variables over the long run
� The desire to evaluate models which combine both long tern as well as short
term properties and which at the same time, maintain stationary in all the
variables has prompted a consideration of the problem of regression using
variables measured in their levels
� The focus of attention was data series which although non-stationary, can be
combined together through a linear combination into a single series which is
itself stationary
� Series which exhibit such property called co-integrated series
Co-integration Modelling Strategy
CO-INTEGRATION MODEL..Cntd
T-stat T-critical T-stat T-critical
1 Rupee Dollar rate -1.67 -3.48 -6.79 -2.91
2 FII -4.54 -3.48 -7.32 -2.91
3 CAD -3.88 4.11 -9.062 -3.54
4 Trade balance -1.449 -3.48 -4.04 -2.91
RESULTS OF UNIT ROOT TEST - ADF
Level First differenceVariablesSr. No. Results
I(1) series
4 Trade balance -1.449 -3.48 -4.04 -2.91
� All variable series is I(1) series – Stationary at 1st difference.
� Co-integration Framework can be applied to analyse this variables
CO-INTEGRATION MODEL…Cntd
JOHANSEN CO-INTEGRATION TEST
1 Trace None 84.42 47.86
2 Trace at Most 1 43.33 29.79
3 Trace at Most 2 18.11 15.49t-stat > t-critical.
Sr. No. Test TypeHypotheised
no of CE(s)Stat value Critical value (5%) Remarks
)1log( *
1max +−−=
rT λλ )1log(
1
*
∑+=
−−=
n
ri
iTTrace λ
Max Eigenvalue Trace Statistics
� Ho : Null Hypothesis = No Co-integration, if t-stat > t-critical then Ho is
rejected.
� There exist long term Co-integration India – Rupee Dollar exchange rate
with FII , CAD and Trade balance.
� Means there is co-movement of this variables.
3 Trace at Most 2 18.11 15.49
4 Trace at Most 3 6.11 3.84
5 Max-Eigen None 41.09 27.58
6 Max-Eigen at Most 1 25.22 21.13
7 Max-Eigen at Most 2 11.99 14.26
8 Max-Eigen at Most 3 6.11 3.84
t-stat > t-critical.
Co-integration
exists
Co-integration – Long Term Causality
If two variables are non-stationary, but they become stationary after first-differencing, and co-integrated, the ECMs for the Granger-causality testcan be specified accordingly as follows:
Co-integration – Long Term Causality varibale coefficient Coefficient Std. Error t-Statistic Prob. Remarks
C(1) -4.29E-05 0.048765 -0.000879 0.9993
C(2) 2.97E-07 1.83E-06 0.162596 0.871
C(3) -7.78E-06 1.97E-06 -3.937794 0.0001 Significant
C(4) -0.101338 0.168383 -0.601828 0.548
C(5) -0.049988 0.156791 -0.318818 0.7502
C(6) 1.27E-06 1.46E-06 0.873925 0.3832
C(7) 1.28E-07 1.32E-06 0.09694 0.9229
C(8) 3.73E-06 3.00E-06 1.246466 0.2141
C(9) 4.25E-06 3.02E-06 1.407851 0.1608
C(10) 1.36E-06 2.83E-06 0.479364 0.6322
C(11) -1.26E-06 2.93E-06 -0.430408 0.6674
C(12) 0.009095 0.029368 0.309684 0.7571
C(13) 12375 6942.128 1.782595 0.0762
C(14) -0.74099 0.260266 -2.847046 0.0049 Significant
C(15) 0.509928 0.281111 1.813975 0.0712
C(16) -8293.938 23970.94 -0.346 0.7297
C(17) -6353.466 22320.75 -0.284644 0.7762
C(18) 0.016026 0.207264 0.077324 0.9384
C(19) -0.097469 0.187906 -0.518713 0.6045
C(20) -0.54121 0.426456 -1.269086 0.2059
C(21) -0.660404 0.429316 -1.538269 0.1256
Error Correction Model - Long term causality
C(25) -403.7109 6350.689 -0.06357 0.9494
C(26) -0.370169 0.238093 -1.554727 0.1216
C(27) -0.75324 0.257162 -2.929053 0.0038 Significant
C(28) 1165.343 21928.72 0.053142 0.9577
C(29) 20120.03 20419.12 0.985353 0.3257
C(30) 0.240448 0.189606 1.268147 0.2062
C(31) 0.468417 0.171897 2.724988 0.007 Significant
C(32) -0.024003 0.390124 -0.061526 0.951
C(33) 0.095062 0.39274 0.242047 0.809
C(34) 0.06535 0.368265 0.177452 0.8593
C(35) 0.128169 0.382209 0.335337 0.7377
C(36) -2764.595 3824.673 -0.722832 0.4706
C(37) -27156.98 13126.49 -2.068868 0.0399 Significant
C(38) -1.169569 0.492123 -2.376577 0.0184 Significant
C(39) -1.096725 0.531538 -2.063306 0.0404 Significant
C(40) 18257.29 45325.36 0.402805 0.6875
C(41) 39061.67 42205.09 0.92552 0.3558
C(42) 1.0339 0.391904 2.638142 0.009
C(43) 1.163749 0.355301 3.275392 0.0012 Significant
C(44) -0.272479 0.806363 -0.337911 0.7358
C(45) 0.001242 0.81177 0.00153 0.9988
C(46) 0.576672 0.761182 0.757601 0.4496
varibale coefficient Coefficient Std. Error t-Statistic Prob. Remarks
Error Correction Model - Long term causality
C(22) 0.382195 0.402562 0.949407 0.3436
C(23) 0.474239 0.417804 1.135074 0.2577
C(24) 5253.318 4180.864 1.256515 0.2104
C(46) 0.576672 0.761182 0.757601 0.4496
C(47) 0.668755 0.790004 0.846521 0.3983
C(48) -9292.987 7905.369 -1.175529 0.2412
Co-integration – Long Term Causality
Results & Interpretations
� 1st Eqn D( RD) – Long term causality flows from independent variable CAD(-1) to
Rupee Dollar Ex. RateRupee Dollar Ex. Rate
� 2nd Eqn D(FII) – Long term causality flows from or is dependent upon its own past
value FII (-1) and FII(-2)
� 3rd Eqn D(CAD)- Long term causality flows from or is dependent upon its own past
value CAD (-1) and FII(-2)
� 4th Eqn D(Trade Balance) – Long term causality flows from or is dependent upon its
own past value RD (-1), TB(-1), FII(-1), CAD(-1), FII(-2)
Co-integration – Granger Causality ( Short term)
d(RD) d(FII) d(CAD) d(TB)
d(RD) 0.94 0.15 0.82
d(FII) 0.59 0.03 0.00
d(CAD) 0.96 0.79 0.38
d(TB) 0.81 0.70 0.84
Note: - All are probability values, Accepted if it is <0.05
Independent
Variable
Dependent Variable
Granger Causality - CASUALITY DIRECTION
Note: - All are probability values, Accepted if it is <0.05
� Uni-directional causal relationship flowing from FII ( ForeignInstitutional Investors ) to CAD ( Current Account Deficit)
� Uni-directional casual relation flowing from FII (Foreign InstitutionalInvestors to TB ( Trade balance )
Analysis/ Interpretation
Conclusion & Recommendation
� Co-integrating /Co-movement / Long term relationship exists betweenRupee Dollar rate, Current Account Deficit & Trade balance.
� There exist the granger causality in short term flowing from FII to CAD andTrade Balance.
� Long term causality – 3 Co-integrating equations flowing from� FII depends upon its own past value of t-1 & t-2;� Uni-directional flow from CAD t-1 to Rupee Dollar Ex. Rate;� Causality flowing from CAD t-1 and FII t-2 to CAD; RD (t-1), TB(t-
1), FII(t-1), CAD(t-1), FII(t-2) flowing to Trade balance.
THAN
K YOUK YOU