A Regression Model for Estimation of Foreign Exchange Rates in India

A REGRESSION MODEL FOR ESTIMATION OF FOREIGN EXCHANGE RATES IN INDIA

PAPER PRESENTED BY:

RUSTOM DALAL 50

NIKITA AGARWA 09 RESHAM KHANNA

1. Introduction:

A regression model is used in statistical analysis to draw conclusions on two or more correlated variables. While a linear regression takes only one dependent and one independent variable, a multiple regression model will take into account several independent variables on which the dependent variable is based on. In most practical circumstances, we hardly find a variable which is dependent on only one factor; and hence we have chosen a multiple regression model to estimate the governing foreign exchange rates of India.

2. The Data:

In order to derive a regression model, we need to ascertain a few variables on which the study is based. In our case, with due thought-processes, we narrowed down to the following factors which may influence the foreign exchange rates i.e. USD:

1. Our Economic Growth Rate i.e. YoY Rise in GDP at Factor Cost:

Foreign investors inevitably seek out stable countries with strong economic performance in which to invest their capital. A country with such positive attributes will draw investment funds away from other countries perceived to have more political and economic risk. Political turmoil, for example, can cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries.

2. The Average Gold Prices in Rs.

3. Consumer Price Index Inflation:

As a general rule, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies.Those countries with higher inflation typically see depreciation in their currency in relation to the currencies of their trading partners. This is also usually accompanied by higher interest rates.

4. Trade Deficit i.e. Indian Imports less Indian Exports :

A deficit in the current account shows the country is spending more on foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the deficit. In other words, the country requires more foreign currency than it receives through sales of exports, and it supplies more of its own currency than foreigners demand for its products. The excess demand for foreign currency lowers the country's exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate