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An ARIMA analysis of the Indian Rupee/USD exchange rate in India

NYONI, THABANI (2019): An ARIMA analysis of the Indian Rupee/USD exchange rate in India.

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Abstract

This study uses annual time series data on the Indian Rupee / USD exchange rate from 1960 to 2017, to model and forecast exchange rates using the Box-Jenkins ARIMA technique. Diagnostic tests indicate that R is an I (1) variable. Based on Theil’s U, the study presents the ARIMA (0, 1, 6) model, the diagnostic tests further show that this model is quite stable and hence acceptable for forecasting the Indian Rupee / USD exchange rates. The selected optimal model the ARIMA (0, 1, 6) model shows that the Indian Rupee / USD exchange rate will appreciate over the period 2018 – 2022, after which it will depreciate slightly until 2027. The main policy prescription emanating from this study is that the Reserve Bank of India (RBI) should devalue the Rupee, firstly to restore the much needed exchange rate stability, secondly to encourage local manufacturing and thirdly to promote foreign capital inflows.

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