DAILY EXCHANGE RATE BEHAVIOUR OF SPECIAL DRAWING RIGHTS PER YUAN

-Dr.Debesh Bhowmik 

Key words- SDR Yuan exchange rate, Autoregressive model,ARIMA model,GARCH model,volatility of exchange rate

JEL-C22,C52,F3,F31

Summery

After the inclusion of Yuan in SDR, the paper scrutinizes the daily exchange rate behavior of SDR per Yuan from 1/12/2015 to 16/2/2016 because monetarists predicted that RMB will be more volatile. The paper conducted to find out semilog trend values of exchange rate including residuals test for serial correlation, heteroscedasticity, autocorrelation and coefficient test for confidence ellipse. The paper verified the autoregressive models at lag one and three for which visibility of autocorrelations were also tested. Even, Box and Pierce(1970) ARMA model is estimated for stationary and stability of the series. Finally, to test volatility the ARCH test has been done including GARCH, and its conditional variance following Bollerslev(1986).The structural break was tested by Bai-Perron model(2003).

The paper showed that the estimated semilog linear  model of the daily exchange rate of SDR per Yuan during 1/12/2015 to 16/2/2016 showed that the exchange rate has been decreasing at the rate of 0.0697% per day which is statistically significant.

The paper showed that the exchange rate is declining, showing stationary and stability but marginal volatility is observed in the ARCH and GARCH models that can be minimized if China slowly and steadily introduce the capital account convertibility and financial sector reform including Yuan internationalization and if China can integrate policy of shore price and onshore pricing.

The sequential F statistic of break test are significant at 5% level which are shown in Table where repartitions were observed at 8,18,26 observations respectively.

After the declaration of the inclusion of RMB in SDR basket in November,2015, the SDR per Yuan is marginally depreciated with US Dollar which follows naturally with spot market rate with SDR and the more volatility was observed since then as predicted by the monetarists. But, the above models showed that those errors can be minimized through good management technique of stabilising exchange rate policy which can be helpful through new liberalized interest rate policy of PBC which can increase offshore and onshore liquidity and minimize their price differences, can follow convergence of forex market, can do more swapping, speed up 20-20 development strategy, introduce macro prudential management, to increase more RMB payments centers, increase linkages between offshore and onshore markets, and increase scope of FTA and so on. To face the absolute gap between RMB fixing and the previous trading day close , the investors can use HKEx’S USD/CNH futures based upon their trading preferences and investment objectives, either as a cost efficient risk management tool to hedge against RMB price risk, to capitalize on short term trading opportunities, or to exploit price discrepancy across the offshore and onshore markets.

The paper concludes that the SDR per Yuan daily exchange rate is not much volatile as has been found from several models studied here and the fear about volatility due RMB inclusion in SDR might be media effect and is not justified because China had already liberalized interest rate and depreciated RMB recently by about 6% that could not boost the volatility of the exchange rate abnormally rather the process of capital account convertibility and measures on Yuan internalization have been continuing speedily. Yet, China has to face competition in the freely floating exchange rate and interest rate with US Dollar and Euro in commodity, money, capital and stock markets respectively where it will have to increase its market capitalization and turn over. 

PUBLISHED IN FAME,VOLUME-2,MARCH 2017,THE JOURNAL OF FINANCE,ACCOUNTING,MANAGEMENT AND ECONOMICS,

SHRI SHIKSHAYATAN COLLEGE ,DEPARTMENT OF COMMERCE

KOLKATA 

REAL EFFECTIVE EXCHANGE RATE OF INDIA:PATTERNS AND DETERMINANTS

INTERNATIONAL JOURNAL FOR RECENT TRENDS IN BUSINESS AND TOURISMVOLUME-1,ISSUE-4,2017,OCTOBER--LINCOLN UNIVERSITY COLLEGE , MALAYSIA

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REAL EFFECTIVE EXCHANGE RATE OF INDIA: PATTERNS AND DETERMINANTS

Debesh Bhowmik

Former Principal, International Institute for Development Studies, Kolkata, India

Corresponding Author Email: debeshbhowmik@rediffmail.com

ABSTRACT

In this paper, author endeavors to establish the patterns and trends of Real Effective Exchange Rate of India during 1970-2015 and tries to show the determinants of REER e.g., growth rate, current account deficit as percent of GDP, percent of openness, foreign direct investment inflows, and foreign exchange reserves excluding gold. The author used semi-log, double log linear and exponential model, autoregression, ARIMA, GARCH models for trends and volatility. Bai and Perron (2003) model was applied to show structural breaks and Hodrick and Prescott (1997 ) model was applied for smoothness of cyclical trend. Johansen (1988, 1991, 1996) models were used to fit co-integration test and vector error corrections. Residual tests were done to verify autocorrelations, normality and impulse response functions were found to show stability and convergence.       

The paper concludes that REER has been declining at the rate 0.4085 percent per year which is insignificant at 5% level during 1970-2015 but it is exponentially declining at the rate of 0.2028 percent which is significant. AR(1) of REER is convergent, stationary and significant but AR(2) is convergent, non-stationary and insignificant. Even ARIMA(1,1,1) is non-stationary because AR(1) is stationary but MA(1) is non-stationary. GARCH(1,1) showed insignificant. Thus the series REER is highly volatile. This series contains five significant structural breaks in 1976, 1986, 1992, (downward) 2004 and 2010 (upward). Its pattern is cyclical which was turned to smooth cycle. Trace statistic showed three cointegrating vectors and Max-Eigen Statistic showed two cointegrating vectors that verify cointegration in the order one. Vector Error Correction model is stable because all roots lie in the unit root circle but it is non-stationary because impulse response functions are diverging and error corrections are significant  only in degree of openness and FDI inflows in relating REER during 1970-2015 with one period lag. Residuals test of VECM confirmed non normality and autocorrelations.

Only sound fiscal and monetary policy can control upward movement of REER so that significant relationships can be achieved with those selected determinants that would spur the growth of international trade.

Keywords- Real Effective Exchange Rate, Stationary, Structural Breaks, Causality, Co-integration, Vector Error Correction

INTRODUCTION

Real Effective Exchange Rate is an important tool in managing international trade and finance and macroeconomic stability in an open economy. It influenced export and import prices and trade volumes. Appreciation and depreciation of REER determined terms of trade, openness, foreign exchange reserves of an economy to a great extent. FDI inflows and current account balance are largely depend on the REER because in the liberalized and globalised world the adjustment in balance of payments is largely correlated with the movement of REER. The REER is closely related with the nominal and real rate by definition when it is trade weighted or export weighted with group of countries. Exchange rate policy whether it is nominal or real controls national inflation and influenced international inflation in which interest rate differential is the crucial and key variable. Today, under globalization REER is closely related with the growth rate also since volatility of REER is the barrier of high growth in which volume of trade matters. According to Balassa-Samuelson effect, volatility of REER influences export competitiveness and productivity. In calculating REER based with export or trade weighted 36 countries, RBI did not consider productivity. Even, India has not long run data on REER and NEER. However, India could not predict well the nature of capital account convertibility, the productivity changes and terms of trade changes in relating to REER. Therefore, the task before RBI is crucial because policy of exchange rate is also related with monetary and fiscal policies as well.

(A) Objective of the study

This paper endeavors to study the behavioral patterns of REER and its determinants in India during 1970-2015 where the author assumed that the basic determinants of REER are growth rate, current account deficit as percent of GDP, openness of the economy, foreign direct investment inflows, foreign exchange reserves excluding gold and so on. The relations were calculated through cointegration and vector error correction models. The policies of REER and limitations of the paper are also the aims of this study.

(B) Methodology and Data

Semi-log, and double-log regression models have been used for trends and relations and exponential model was used also for goodness of fit. AR(1), AR(2), ARIMA(1,1,1) and GARCH(1,1) models were applied to show autoregression, stationary and volatility analysis. Bai-Perron (2003) model was applied to find structural breaks. Granger  model(1969) was used to get causality. Hodrick-Prescott Filter model (1997) was used to find smoothness of cycles which allows to manage the exchange rate volatility. Johansen models (1988, 1991, 1996) were applied for cointegration and vector error correction analysis. Moreover, residual tests of VECM were also done for autocorrelation and normality. The data of REER, growth rate, current account deficit, openness, FDI inflows and foreign exchange reserves during 1970-2015 have been collected from RBI, World Bank and International Financial Statistics(IMF).

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CAPITAL INFLOWS AND SILVER STANDARD IN INDIA

ACHARYA BANGALORE B SCHOOL MANAGEMENT BUSINESS AND ENTREPRENEURSHIP REVIEW

VOLUME NO-8,ISSUE-1,OCTOBER 2016 - MARCH 2017

TITLE OF THE PUBLISHED PAPER-CAPITAL INFLOWS AND SILVER STANDARD IN INDIA

AUTHOR-DR.DEBESH BHOWMIK

ABSTRACT

Capital inflows and Silver Standard in India

Dr.Debesh Bhowmik

In this paper author tries to relate gold and silver inflows with GDP,GDP per capita,export, import and gold silver price ratio in India during silver standard regime from 1851 to 1893. Author used semi-log,double-log regression models, Johansen cointegration and VAR models (1991,1996) and Bai-Perron model(2003) for structural change taking data from Maddison(2006) and Ambedkar(1923). The paper concludes that gold inflows during 1851-1893 had decreased at the rate of 0.34% per year insignificantly but it was nonstationary, convergent and had no structural breaks. Silver inflows during 1851-1893 had increased at the rate of 1. among silver inflows and gold inflows with those variables were also insignificant although GDP, export, import,and gold silver price ratio had been increasing at the rates of 0.52%,9.14% ,5.16% and 0.77% per year significantly. But double-log linear regression model suggested that gold inflows had significant impact from GDP,GDP per capita, export, and gold-silver price ratio but had no significant impact of silver inflows from those variables during 1851-1893 respectively. Yet,there is bidirectional causality among gold inflows, GDP, GDP per capita, export, import and gold silver price ratio significantly during the given period. Even, there were sharp depreciation of rupee sterling rate,falling silver price ,silver production and rising gold price and gold production during the silver standard regime. Thus, gold and silver inflows could not synthesize the silver standard more effective in macro-dynamic adjustment during 1851-1893 although the series of managerial experiments of the commissions and government are equally responsible for instability of the silver standard in India which was equally identical with gold standard in England.

Key words-Net gold inflows, net silver inflows, silver standard, GDP, export, import, cointegration, VAR

JEL-E42,F33,N10,N20