Impact of Currency Futures Issuance on Foreign Exchange Rate Volatility in India

Abstract

This article examines the effect of currency futures on foreign exchange rate volatility in India focusing on USD-INR, EUR-INR, GBP-INR and JPY-INR. For the period from February 2002 to February 2020, the daily exchange rate values of all the four currencies against the Indian rupee (INR) were collected. The Augmented Dicky Fuller (ADF) test of the unit root was performed to check the stationarity of the time series data utilized in the study. After verifying the presence of heteroskedasticity with the ARCH LM test, GARCH (1, 1) modelling is employed to assess the impact of the launch of currency futures on the volatility of India's foreign exchange rate. The findings clearly depict that presence of volatility persistence is there for USD-INR, GBP-INR, EUR-INR, and JPY-INR. The volatility of returns of exchange rate before and after currency futures was discovered to be different as it is higher in pre futures period for USD-INR, and GBP-INR whereas for EUR-INR and JPY-INR it is higher in post futures period.The major implication is that when constructing hedging strategies, investors must account for volatility persistence between currency futures and spot markets.

Foreign Exchange Futures Trading and Spot Market Volatility in Thailand

“…They have not found any strong evidence supporting the destabilizing effect of the FX derivatives market. However, in contrast with the study by Jin et al (2021), Rani et al (2022) and Singh and Patra (2022) show that the unconditional variance of the USD/INR exchange rate decreases in the post period. Rani et al (2022) and Singh and Patra (2022) also investigated GBP, EUR, and JPY futures traded on the National Stock Exchange.…”

“…However, in contrast with the study by Jin et al (2021), Rani et al (2022) and Singh and Patra (2022) show that the unconditional variance of the USD/INR exchange rate decreases in the post period. Rani et al (2022) and Singh and Patra (2022) also investigated GBP, EUR, and JPY futures traded on the National Stock Exchange. They came to the same conclusion that the unconditional variance in the GBP/INR exchange rate decreases in the post period.…”

“…They came to the same conclusion that the unconditional variance in the GBP/INR exchange rate decreases in the post period. For EUR and JPY, Singh and Patra (2022) found decreasing volatility in exchange rate returns in the post period, but Rani et al (2022) witnessed opposite results.…”

An Evaluation of Current Account Behaviour Amidst Globalisation

“…As a whole, the study concluded that exports are predominantly influenced by factors other than real exchange rate volatility. Rani et al (2022) observed the influence of currency futures on volatility of Indian rupee exchange rate based on Indian rupee vis-a-vis US dollar, Euro, UK pound and Japanese yen covering a period from February 2002 to February 2020. The results of GARCH (1,1) model brings out that volatility persists for considered bilateral currency's exchange rates.…”