The Dynamics of India’s Major Exchange Rates

Abstract

In this article, we analyze the dynamic properties of India’s major exchange rates, both in the short and the long runs. The particular issue of our concern is to find whether present values of the exchange rates depend (a) on their own past values and (b) on the past values of India’s other exchange rates. Since the series exhibit long memory, the autoregressive fractionally integrated moving average (ARFIMA) model is used for the first purpose and the cross-correlation, entropy transfer and vector auto regression (VAR) models are used for the later purpose. Combining the results of these models, we conclude that, in general, the Indian exchange rates are persistent and depend only on their immediate past values. In particular, past values, older than two periods (days in this case), do not appear to be consistently relevant in modelling the current value. These observations have clear implications for exchange rate trades using technical analysis (TA) and for exporters and importers.