Study of Volatility in Foreign Exchange Market: A MacroEconomic Perspective

Dr Sunita Jindal Dr N.K Sharma

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Introduction
The foreign exchange volatility has a direct impact on the macroeconomic factors Current account deficit, the balance of trade, the Forex reserves created by government, the stock market, the profit margins of different sectors of industries, the interest rates, export import payments and hedging all are affected by the fluctuation in the currency i.e. its volatility.
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Objective of the study

To establish the relationship and find out the reason and effect of the exchange rate volatility on balance of trade and economy as a whole. The measures taken by the RBI to contain the excessive fluctuations. The whole of the study has been made keeping in view the Indian economic conditions. INR has been taken as the basic currency in contrary to which the other currencies (USD,JPY,CHF, EUR. GBP) taken to determine the exchange rate and then the correlative study has been made after taking the hypothesis.
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Scope of Study
This study would reveal the variations in the foreign exchange and thus would help in analyzing the trade. The study will provide an understanding of the various factors that create an impact on stock market in the country (India)

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Research Methodology
Data is collected from secondary sources like RBI websites, and NSE websites. After collecting this data correlation is used for analysis and interpretation. Correlation is a statistical measurement of the relationship between two variables. Possible correlations range from +1 to 1.

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Hypothesis
Ho: Exchange rate volatility has no effect on the macro economic factors as stock market and balance of trade. H1: Exchange rate volatility has effect on the stock market fluctuations H2: Fluctuations in the currency market affect balance of trade

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Testing of Hypothesis
H1: Exchange rate volatility has effect on the stock market fluctuations For testing the hypothesis average value of five currencies USD. JPY, CHF. EUR, GBP is taken. On X axis % change in currencies are taken as X an independent variable and % change in yearly value of Sensex is taken as Y, then correlation is calculated and interpretation is given after the value of correlation. In each case validity of correlation value is interpreted.
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The Correlation ( r ) between (USD And INR) And BSE Sensex r= 0.228368
Year 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
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% in rate INR/USD(X) 0.455 5.594 -11.729 -4.870 12.590 1.889

% in value of Sensex -14.684 14.844 44.761 110.286 32.041 31.834

Table: 1.2 The Correlation (r) between (INR and JPY) And BSE Sensex r= 0.395969
Year 2010-11 % in rate INR/JPY(X) -6.215 % in value of Sensex -14.684

2009-10 2008-09
2007-08 2006-07 2005-06
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.650 -23.902
-19.082 11.646 1.189

14.844 44.761
110.286 32.041 31.834

The Correlation (r) between (INR and CHF) And BSE Sensex r= 0.639217
Year 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
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% in rate INR/USD(X) -10.266 -1.862 -11.272 -16.550 9.639 1.048

% in value of Sensex -14.684 14.844 44.761 110.286 32.041 31.834

The Correlation (r) between (INR and EUR) And BSE Sensex r= 0.657038
Year 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
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% in rate INR/USD(X) -2.484 10.152 -5.902 12.739 1.695 5.460

% in value of Sensex -14.684 14.844 44.761 110.286 32.041 31.834

The Correlation (r) between (INR and GBP) And BSE Sensex r= 0.030735
Year 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
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% in rate INR/USD(X) 0.455 5.594 -11.729 -4.870 12.590 1.889

% in value of Sensex -14.684 14.844 44.761 110.286 32.041 31.834

Data Interpretation
correlation between (INR and USD) and BoT is r =0.666274 correlation between (INR and JPY) and BoT is r = 0.525871 correlation between (INR and CHF) and BoT is r = .275787 correlation between (INR and EUR) and BoT is r =0.114812 correlation between (INR and GBP) and BoT is r = -0.22013
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Hypothesis Testing -2
H2: Volatility in the foreign currency market affects the balance of trade For testing this hypothesis, volatility in Forex market is taken as independent variable and balance of trade is dependent variable. In following tables correlation is calculated for the % change in five currencies and % change in the value of balance of trade (BoT)
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Findings
Ho to be true as The volatility in the exchange market does not affect volatility in the Stock Market in case of USD,JPY and GBP. null hypothesis Ho to be rejected since the coefficient of correlation is more tending to one. The hypothesis H1: Exchange rate volatility (CHF) has effect on the stock market fluctuations is correct. Ho to be wrong since the coefficient of correlation is more tending to one. The hypothesis H1: Exchange rate volatility has effect on the stock market fluctuations is correct. This hypothesis is specifically being found to be correct in the currency taken as EUR with respect to INR.
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Continued..
Null hypothesis been proved wrong and the hypothesis taken as H2: Fluctuations in the currency market affect on the balance of trade has been proved right in case of USD and JPY Correlation between the variables does not exist and is proving the null hypothesis Ho to be true as The volatility in the exchange rate of INR/CHF, EUR and GBP does not affect the variations in the balance of trade. Both go independently.
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Discussion

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