Today the Reserve Bank of India placed on its website a Working Paper titled “Predicting Exchange Rate in India: A Non-parametric Causality-in-Quantiles Approach” under the Reserve Bank of India Working Paper Series*. The Paper is authored by Seema Jaiswal.
Using the non-parametric causality-in-quantiles approach, the paper examines the relationship between the INR/USD exchange rate, and the crude oil and gold prices, domestic and global stock prices, volatility index (VIX) and net foreign portfolio investments under various foreign exchange market conditions. This investigation is carried out for the different quantiles of the conditional distribution of the exchange rate.
The empirical analysis indicates that most of the selected variables exhibit causality with the exchange rate of the INR for all quantiles excluding the two extreme ends of the conditional distribution. Crude oil price, domestic and global stock index returns, net portfolio investment returns, and the global volatility index cause variations in the exchange rate return during the normal conditions in the foreign exchange market, excluding the lower and upper quantiles