A Study On Factors Affecting Exchange Rate In Foreign .

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IOSR Journal of Business and Management (IOSR-JBM)e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 22, Issue 6. Ser. VIII (June. 2020), PP 39-51www.iosrjournals.org‘A Study on factors affecting exchange rate in foreign exchangemarket.’Yashvi Shah, Kosha ModiStudent, Faculty of Management, GLS University, Ahmedabad-380006.Student, Faculty of Management, GLS University, Ahmedabad-380006.AbstractThe foreign exchange market is the world’s largest market with highest volume of trade transactions. Theforeign exchange markets are subject to high volatility between currency exchange rates. The research focusesover factors that influence foreign exchange rates with increased focus over impact of crude oil prices overexchange rate and impact of NSE (Nifty 50) equity investment on share prices. For conducting analysis thehistorical data of past 10 years is taken into consideration and results are derived by conducting univariateanalysis, correlation analysis, regression and R square analysis. The data collected has been collected throughauthenticated data sources of Reserve Bank of India. Four currency pairs have been taken for consideration.Analysis of US Dollar, Great British Pound, Euro and Japanese Yen has been considered for evaluation withcomparison to Indian rupee.Upon analysis of the data collected findings suggest that crude oil prices have significantly less impact ascompared to the impact caused by the price and investment in Nifty 50. Since the past 10 years Indian rupee hasfaced depreciation. The continuous fall in Indian rupee is warning signal for the Indian economy and all itssectors.Keywords: Depriciation, univariate, correlation, regression, R ------------------------------- ---------Date of Submission: 08-06-2020Date of Acceptance: ----------------------------------- ----------I.IntroductionThe foreign exchange market in India originated in 1978 when banks were permitted to undertakeintraday trading in currencies but major changes that helped in building of modern foreign exchange marketwere introduced in 1990s. Till 1992-1993 the foreign exchange market was fully under the control of Indiangovernment who monitored and regulated all the policies to control exchange rates, import-export policies,foreign direct investment and foreign institutional investment, etc. Foreign Exchange Regulation Act (FERA)was enacted in 1973 which helped the government a lot to regulate exchange rates. After the economic reformsof 1991 Indian government liberalized foreign exchange market and introduced Foreign Exchange ManagementAct (FEMA) in 1999, which liberalized foreign exchange trading, Import-Export procedures, etc.Reserve Bank of India (RBI) still has the necessary authority and powers to regulate the exchange ratesand foreign exchange transactions. The exchange rate in the foreign exchange market saw periods of highvolatility since May 2013. To regulate the depreciation of the Indian Rupee policies included necessarymeasures to control CRR ratio, Trading restrictions and market interventions.The Indian foreign exchange market majorly deals in 4 currency pairs that contribute to majority of thetransactions in Multi Commodity Exchange. These currency pairs include USD/INR (US Dollar/Indian Rupee),EUR/INR (EURO/Indian Rupee), GBP/INR (Great British Pound/Indian Rupee) and JPY/INR (JapaneseYen/Indian Rupee). Besides them any currency can be traded on a international market.II.ObjectivePrimary Objectives To analyze currency pairs and their exchange rates and evaluate major factors responsible for change intheir values.Secondary Objectives To analyze the relation between Currencies, Nifty 50 and Crude oil. To study dependency between Currencies, Nifty 50 and Crude oil. To forecast the future prices.DOI: 10.9790/487X-2206083951www.iosrjournals.org39 Page

‘A Study on factors affecting exchange rate in foreign exchange market.’III.Data MethodologyThe research design for this research is descriptive and causal. The data will be collected throughsecondary data collection from various sources such as books, research papers, magazines, periodical articlesand journal articles. Required data for conducting forecasting and analysis will be gathered from websites ofIndian as well as foreign exchanges such as BSE, NSE, NASDAQ, etc. All the data collected will be relative tothe topic and will help in understanding and analyzing multiple aspects of foreign exchange market.IV.Literature ReviewDeepa Gulati and Monika Kakhani (Nov, 2012) It tells us about the stock market and foreign market. Italso tells us about whether there is a casual relationship or not between the foreign exchange rate and stockmarket. By claiming the relationships between the INR/ exchange rate the Indian stock indices weredetermined for data 2004 and 2012.Ayush Singh, (2016) he had studied the impact of the INR – USD on Indian economy. The factorswhich have been affecting the Indian currency rates that leads to the depreciation of Indian rupee against the USdollars. Due to that it has been affecting a lot on the Indian economy such as the demand and supply ofcurrencies, changing interest rates and the technical factors.Mr Srikanth, (2014) analyzed how the foreign exchange currencies are been greatly determined by theforward markets and it was been prepared by the changing interest rates, and balance of the payments. Since,many years the Indian foreign exchange markets have been proved by the long lasting component.Prof Michael, (2013) analyzed the USD and INR the ancient data and also to understand that how theIndian rupee affects the Indian economy. In this paper it specially focuses on the forecast of the INR – USDexchange rates. The most significant variables those hypothetically affect foreign exchange rate, balance oftrade, interest rate and inflation rates.Dr. R Venkata Raman, (2015) this study examined about the bonds between the stock return andforeign exchange in India throughout the duration time from 2000 January to 2014 June. The outcomerecommend that us dollars and euro lasting connections with the CNN and Sensex.Desis lava Dimintrova (2005) investigated the link between the stock prices, exchange rate, fiscalpolicy and monetary policy. The study concluded that the interest rate parity conditional effects the stock pricessignificantly.Tomoe Moore, Eric. J. Pentecost (2006) entitled ―The Sources of Real Exchange Rate Fluctuations inIndia ― attempted to find out the different sources of exchange rate appreciation by using Value at riskapproach. There are nominal shocks which play an important role in defining nominal exchange rate, but, for thecase of real exchange rates, nominal shocks are inapplicable. The study further explores that nominal and realexchange rates are not co integrated, i.e, they are not having any linear relationship in the long run.(1)Analysis of USD/INR and crude oilCorrelation between USD/INR and crude oil.Change % CRUDE OILChange % CRUDE OIL1Change % USD/INR0.120734479Change % USD/INR1Interpretation: The correlation value comes (-0.602627222) which means there is a negative correlation.Interpretation: - The R Square value is 0.01421501 which is less than 50% which shows less dependency oncrude oil on USD/INR.Regression StatisticsMultiple R0.119226716R Square0.01421501Adjusted R Square0.007123032Standard DOI: osrjournals.orgF2.004379Significance F0.15908234340 Page

‘A Study on factors affecting exchange rate in foreign exchange 86.512769793Interpretation: - The value of significance F in one way anova is 0.159082343 which being more than 0.05 soit can be said that USD/INR prices do not have a significant impact over crude oil.CoefficientsStandard Errort StatP-value Lower 95% Upper 95%InterceptX Variable 76977Regression Slope: 0.0324207130.032420713 Crude oil.DOI: 10.9790/487X-2206083951Y intercept: 0.437639009 Regression Line: Y a bx USD 0.437639009 www.iosrjournals.org41 Page

‘A Study on factors affecting exchange rate in foreign exchange market.’(2)Analysis of USD/ INR and Nifty 50.Correlation between USD/INR Exchange rate and Nifty 50.Change % NIFTY 50Change % USD/INRChange % NIFTY 501Change % USD/INR-0.6026272221Interpretation:- The correlation value comes (-0.602627222) which means there is a negative correlation.Regression StatisticsMultiple R0.627209531R Square0.393391796Adjusted R Square0.389027708Standard Error2.001916241Observations141Interpretation:- The value of R Square is 0.393391796 which is less than 50% which shows less dependencyof Nifty 50 on USD/INR egressionSignificance F8.70435E-17Interpretation:- The value of F significant in one way anova is 0.00 which being less than 0.05 so it can be saidthat Nifty 50 prices have a significant impact over USD/INR exchange rate.Coefficients Standard Errort StatP-valueLower 95%Upper 760.32432110.99649696X variable 12-0.20857304Regression slope: -0.26343212 Y intercept: 0.660409068 Regression line: Y a bxUSD 0.660409068 (-0.26343212) Nifty 50.DOI: 10.9790/487X-2206083951www.iosrjournals.org42 Page

‘A Study on factors affecting exchange rate in foreign exchange market.’(3) Analysis of GBP/INR and Nifty 50.Correlation between GBP/INR and Nifty 50.Change % NIFTY 50Change % GBP/INRChange % NIFTY 501Change % GBP/INR-0.175886121Interpretation:- The correlation value is -0.17588612 which means there is a negative correlation.R square analysis:Regression StatisticsMultiple R0.183405912R Square0.033637729Adjusted R Square0.026685482Standard Error2.984420867Observations141Interpretation: The value is 0.033637729 which is less than 50% which shows less dependency on Nifty 50and onMSFSignificance F4.8383970.029485106Interpretation: - The value of F significant 0.029485106 which is less than 0.05 so it can be said that nifty 50prices have a significant impact on GBP/INR exchange rate.Table 3.14CoefficientsStandard Errort StatP-value Lower 95% Upper 95%InterceptX variable 0920Regression slope: -0.090984567 Y intercept: 0.232056578GBP 0.232056578 (-0.090984567) Nifty 50.DOI: 10.9790/487X-2206083951Regression line: Y a bxwww.iosrjournals.org43 Page

‘A Study on factors affecting exchange rate in foreign exchange market.’(4)Analysis of GBP/INR and crude oil.Correlation between GBP/INR Exchange rate and Crude oil.Change % CRUDE OILChange % GBP/INRChange % CRUDE OILChange % GBP/INR10.4947915631Interpretation:- The correlation value comes 0.494791563 which means there is a positive correlation.R square analysis:Regression StatisticsMultiple R0.494895465R Square0.244921522Adjusted R Square0.239489302Standard Error2.638068881ObservationsDOI: 10.9790/487X-2206083951141www.iosrjournals.org44 Page

‘A Study on factors affecting exchange rate in foreign exchange market.’Interpretation:- The value of R Square is 0.244921522 which is less than 50% which shows less dependencyof crude oil on 281.135218Significance F4.43156E-10Interpretation:- The value of significance F in one way anova is 0.000000000443 which being less than 0.05so it can be said that Crude oil prices have a significant impact over GBP/INR exchange rate.CoefficientsStandard Errort StatP-valueLower 95%Upper 0.3607328370.51910447X variable 0.205753948Regression slope: 0.15895009 Y intercept: 0.079185817 Regression line: Y a bxGBP 0.079185817 0.15895009 CRUDE OILDOI: 10.9790/487X-2206083951www.iosrjournals.org45 Page

‘A Study on factors affecting exchange rate in foreign exchange market.’(5)Analysis of EUR/INR and nifty 50.The correlation between EUR/INR and Nifty 50.Change % NIFTY 50Change % NIFTY 50Change % EUR/INR1-0.1061281341Change % EUR/INRInterpretation:- The correlation value is 0.494791563 which means there is a positive correlation .R square analysis:Regression StatisticsMultiple R0.099813129R Square0.009962661Adjusted R Square0.00284009Standard Error2.87092653Observations141Interpretation: - The value of R Square is 0.009962661 which is less than 50% which shows less dependencyof nifty 50 on EUR / Significance F1.3987450.238952834Interpretation:- The value of significance F in one way anova 0.238952834 is which being greater than 0.05 soit can be said that Nifty 50 prices do not have a significant impact over EUR/INR.CoefficientsStandard Errort StatP-valueLower 95%Upper 95%InterceptX variable .0316132Regression slope: -0.047059605 Y intercept: 0.294305617EUR 0.294305617 (-0.047059605) Nifty 50.DOI: 10.9790/487X-2206083951Regression line: Y a bxwww.iosrjournals.org46 Page

‘A Study on factors affecting exchange rate in foreign exchange market.’(6) Analysis of EUR/INR and crude oil.Correlation between EUR/INR exchange rate and crude oil.Change % CRUDE OILChange % CRUDE OILChange % EUR/INR1Change % EUR/INR0.3676810791Interpretation:- The correlation value is 0.367681079 which means there is a positive correlation.R square analysis:Regression StatisticsMultiple R0.370535714R Square0.137296715Adjusted R Square0.131090217Standard Error2.67995201Observations141Interpretation:- The value is 0.137296715 which is less than 50% which shows less dependency of Crude oilon EUR / 57.197224Significance F6.1039E-06Interpretation: - The value of significance F in one way anova 0.00000610390 is which being less than 0.05 soit can be said that crude oil prices have a significant impact over EUR/INR crude oil.CoefficientsStandard Errort StatP-value Lower 95% Upper 7541710.6462642X variable 24Regression slope: 0.113105464 Y intercept: 0.199361279 Regression line: Y a bxEUR 0.199361279 0.113105464 CRUDE OIL.DOI: 10.9790/487X-2206083951www.iosrjournals.org47 Page

‘A Study on factors affecting exchange rate in foreign exchange market.’(7)Analysis of JPY/ INR and nifty 50.Correlation between JPY/INR Exchange rate and Nifty 50.Change % NIFTY 50Change % NIFTY 50Change % JPY/INRChange % JPY/INR1-0.5183013931Interpretation:- The correlation value is -0.518301393 which means there is a negative correlation.R square analysisRegression StatisticsMultiple R0.512421664R Square0.262575962Adjusted R Square0.257270753Standard Error3.198456082ObservationsDOI: 10.9790/487X-2206083951141www.iosrjournals.org48 Page

‘A Study on factors affecting exchange rate in foreign exchange market.’Interpretation: - The value of R Square is 0.262575962 is which is less than 50% which shows lessdependency of Nifty 50 on JPY / egressionSignificance F8.28158E-11Interpretation:- The value of significance F in one way anova 0.00 is which being less than 0.05 so it can besaid that nifty 50 prices have a significant impact over JPY/INR.CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Y .2597424X variable 242217Regression slope: - 0.311869959 Y intercept: 0.722775743 Regression line: Y a bxJPY 0.722775743 (-0.311869959) Nifty 50DOI: 10.9790/487X-2206083951www.iosrjournals.org49 Page

‘A Study on factors affecting exchange rate in foreign exchange market.’(8)Analysis of JPY/INR and Crude oil.Correlation between JPY/INR Exchange rate and Crude oil.Change % CRUDE OILChange % CRUDE OILChange % JPY/INR1Change % JPY/INR-0.064053391Interpretation:- The correlation value is -0.06405339 which means there is a negative correlation.R-Square analysis:Regression StatisticsMultiple R0.059448732R Square0.003534152Adjusted R Square-0.003634667Standard Error3.718030567Observations141Interpretation:- The value of R Square is 0.003534152 which is less than 50% which shows less dependencyof Crude on JPY / ignificance F0.492989390.483770896Interpretation:- The value of significance F in one way anova is 0.483770896 which being greater than 0.05so it can be said that Crude oil prices do not have a significant impact over JPY/INR.CoefficientsStandard Errort StatP-valueLower 95%Upper 95%InterceptX Variable 0893890.042539121Regression slope: -0.023425106 Y intercept: 0.490807157JPY 0.490807157 (-0.023425106) Crude oilDOI: 10.9790/487X-2206083951Regression line: Y a bxwww.iosrjournals.org50 Page

‘A Study on factors affecting exchange rate in foreign exchange market.’HYPOTHESISSo crude oil prices do not have significant impact over USD/INR, Nifty 50 prices have a significant impact overUSD/INR.Crude oil prices have significant impact over GBP/INR and are same in case of NIFTY 50.Crude oil prices have significant impact over EUR/INR; Nifty 50 prices do not have a significant impact overEUR/INR.Crude oil prices do not have significant impact over JPY/INR; Nifty 50 prices have a significant impact overJPY/INR.V. ConclusionIn the past 10 years Indian rupee has seen a significant decline in relation to some of the majorcurrencies of forex market. The decline in rupee value is a warning signal for the Indian economy. The decreasein the value of rupee affects all the sectors of the economy. Due to the decline in rupee, there is hidden inflationwhich results in declining the growth of economy. The Indian government should take initiatives to encouragethe foreign investment to larger extent and not only for short term. Efforts should be made to reduce the importand encourage exports in order to bring current account deficit to lower [9].[10].[11].Aghion, P., Bacchetta, P., Ranciere, R., & Rogoff, K. (2006). Exchange Rate Volatility And Productivity Growth: The Role ofFinancial Development. Cambridge. Massachusetts: National Bureau Of Economic Research. Retrieved fromhttps://www.nber.org/papers/w12117.pdfAmadeo, K. (2018, November 8). US Dollar Symbols and Denominations. Retrieved from The 3305729Amadeo, K. (2019, January 28). Why the US Dollar Is the Global Currency. Retrieved from The 3305931Betz, e. (2018, January 18). What Happened the last Time Antartica Melted. Discover. Retrieved e, S. (2013). The global gold market and the international monetary system. Enlighten – Research publications by membersof the University of Glasgow (pp. 17-38). University of Glasgow. Retrieved from , R., & Croce, M. M. (2007, November 27). Risks for Long Run and real Exchange Rate.D.Bordo, M., & Eichengreen, b. (1991). A Retrospective on the Bretton Woods System: Lessons forInternational Monetary Reform.(pp. 3-108). University of Chicago Press. Retrieved from old, E. (2018, January 2). Higher environmental impact from cookstove emissions. The source. Retrieved sions/Engel, C. (2011). The Real Exchange rate, real interest rates and the risk premium. Massachusetts: National Bureau of EconomicResearch. Retrieved from ts.whiterose.ac.uk/83/1/thomascd1.pdf8Yashvi Shah, et. al. “A Study on factors affecting exchange rate in foreign exchange market."IOSR Journal of Business and Management (IOSR-JBM), 22(6), 2020, pp. 39-51.DOI: 10.9790/487X-2206083951www.iosrjournals.org51 Page

Act (FEMA) in 1999, which liberalized foreign exchange trading, Import-Export procedures, etc. Reserve Bank of India (RBI) still has the necessary authority and powers to regulate the exchange rates and foreign exchange transactions. The exchange rate in the foreign exchange market saw periods of high volatility since May 2013.

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