Structural Changes in the Indian Foreign Exchange Market Due to Liberalization Measures: An Econometric Analysis

Student Name: Vathsala Srinivasan

Monthly Indian Rupees - US Dollar exchange rate series was analyzed in this thesis, starting from the basket-peg era (September 1975 to June 1991) to the transition period (July 1991 to March 1993) to the liberalized floating exchange rate regime (April 1993 to June 1998), using simple descriptive techniques, ARIMA modeling, intervention analysis for different foreign exchange policy changes and cointegration analysis with other relevant covariates. Though a change in volatility was detected from simple descriptive statistics, the intervention analysis with ARIMA modeling did not reveal any one major turning point with a permanent effect due to changes in Indian foreign exchange policies. Subsequent cointegration analysis with other covariates revealed that only the wholesale and consumer price indices and their differentials were cointegrated with the exchange rate during the basket-peg period, while the black-market rate was found to be co-integrated in both basket-peg and liberalized floating rate periods. These findings led one to conclude that during the basket-peg period though there was a depreciative trend preferred by the authorities, the Reserve Bank of India (RBI) did not omit relevant economic information and set up the Rupee rate arbitrarily and market forces were still at play in the Rupee rate determination even in this basket-peg period. In the float-period regime, though the Indian foreign exchange market is getting more disciplined, there is still prominent intervention by the RBI through its policy changes in keeping the rate in the desired direction and it is a play between emerging market players and the authorities who are still highly dominant.