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.