2. 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.
3. Framework & Tools Used
Data Source from Indianstat.com and RBI website
Graphical Comparison- Primary Analysis
Co-integration & VAR FrameworkCo-integration & VAR Framework
Regression/ Correlation
Eviews software.
4. Historical Movement of Rupee
Focus Area
Dynamic movement on Rupee post Global Financial Crisis affecting
Indian Economy
5. 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
Nov-99
Apr-00
Sep-00
Feb-01
Jul-01
Dec-01
May-02
Oct-02
Mar-03
Aug-03
Jan-04
Jun-04
Nov-04
Apr-05
Sep-05
Feb-06
Jul-06
Dec-06
May-07
Oct-07
Mar-08
Aug-08
Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
Feb-11
Jul-11
Dec-11
May-12
Oct-12
Mar-13
Aug-13
Jan-14
Jun-14
Nov-14
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
6. 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 <=2
Model OK Model OK
7. 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
9. 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 difference
VariablesSr. 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
10. 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 15.49
t-stat > t-critical.
Sr. No. Test Type
Hypotheised
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
11. 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 test
can be specified accordingly as follows:
13. 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)
14. 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 ( Foreign
Institutional Investors ) to CAD ( Current Account Deficit)
Uni-directional casual relation flowing from FII (Foreign Institutional
Investors to TB ( Trade balance )
Analysis/ Interpretation
15. Conclusion & Recommendation
Co-integrating /Co-movement / Long term relationship exists between
Rupee Dollar rate, Current Account Deficit & Trade balance.
There exist the granger causality in short term flowing from FII to CAD and
Trade 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.
