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The Reserve Bank of India (RBI) has released Working Paper No. 12/2022 titled “Predicting Exchange Rate in India: A Non-parametric Causality-in-Quantiles Approach” under the RBI Working Paper Series. The paper is authored by Seema Jaiswal.
The study employs a non-parametric causality-in-quantiles approach to examine the relationship between the INR/USD exchange rate and various factors including crude oil and gold prices, domestic and global stock indices, the volatility index (VIX), and net foreign portfolio investments under different foreign exchange market conditions. The analysis considers different quantiles of the conditional distribution of the exchange rate.
The empirical findings indicate that most of the selected variables exhibit causality with the INR exchange rate across all quantiles, except at the extreme lower and upper ends of the distribution. Specifically, crude oil prices, domestic and global stock returns, net portfolio investment returns, and the global volatility index are found to influence variations in exchange rate returns under normal market conditions.
These insights provide a nuanced understanding of how multiple domestic and global financial factors drive the movement of the Indian rupee in different market scenarios.
[RBI]