Effectiveness of currency futures market in India: An empirical investigation

Abstract

This article investigates the role of currency futures market in India in the context of high volatility of Indian rupee (INR) in recent years. It examines whether the spot volatility before and after the introduction of currency futures were significantly different. It also examines the volatility causation between currency spot and futures market in India. The study considers three international currencies, namely US dollar (USD), British pound (GBP) and Euro in relation to INR for the period of 2006–2013. It made use of GARCH model framework and Granger causality test. The GARCH model results indicate that after the introduction of futures, there is less volatility for GBP and Euro but not in the case of USD. The Granger causality test reveals that USD and Euro has unidirectional causality, which means that spot causes future fluctuations, while in the case of GBP, there is bidirectional causality. The study concludes that the introduction of futures is not effective in reducing spot volatility for INR–USD but there is a marginal effect for INR–GBP and INR–Euro.