ICF Presentation 1

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



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

ICF Presentation 1

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