An Empirical Investigation on the Relationship between Onshore and Offshore Indian Rupee Market

Exchange rate movements have important ramifications for the economy’s business cycle, trade and capital flows. For India, the exchange rates fluctuations have consequences for being competitive in terms of international trade and capital flows, tourist destination and for maintaining a healthy international reserve. This paper attempts to explore the relationship between rupee-dollar exchange rate in spot market, domestic forward market and off-shore forward i.e. non-delivery forward market (Singapore) to understand the information flow in between these markets. Suitable econometric techniques including causality analysis was used for the study for the period 2002 to 2014 after considering structural breaks and sub period analysis was also done. It was found that the relationship between all three markets is quite dynamic with evidences of causality in one sub period and reverse direction or no causality in other sub periods, conditional upon intervention done by RBI to curb the volatility and on various macroeconomic shocks such global financial crisis.