Exploring dynamic relationships among Indian export currencies

What the paper says

Purpose This study aims to analyze the dynamic relationship between India’s major seven export currencies: the US Dollar, the Dirham, the Yuan, the Hong Kong Dollar, the Singapore Dollar, the British Pound and the Euro, as a country’s strong exports lead to increased demand for its currency and appeal to investors due to expected profits. Design/methodology/approach The relationship among seven key currencies was studied from 2011 to 2021 using a volatility model of Granger causality test, the Vector Auto-Regressive model, variance decomposition, Impulse response function and Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroscedasticity. Findings The study found significant Granger causality from the US Dollar to the Hong Kong Dollar up to lag 3, suggesting a short-term predictive relationship. However, the VAR model indicates that past values of the US Dollar do not significantly influence the Dirham, Yuan, Singapore Dollar, British Pound or Euro. The Hong Kong Dollar is most influenced by USD shocks, with approximately 0.215% of its forecast error variance attributed to USD. Practical implications This research will help investors create a better risk-adjusted international portfolio. International professional investors who hold these currencies should be cautious because any impact on the US Dollar will also affect the other currencies. Originality/value Only a few researchers have considered the foreign currency market while developing models. However, to the best of the author’s knowledge, no research has been conducted on the impact of currency volatility on key Indian export nations’ currencies using a wide variety of statistical applications.