An empirical evidence of the casual nexus between Indian Foreign Currency Futures and Spot markets

Abstract

The study empirically analyses the interdependence and price discovery mechanism between the spot and futures prices of Indian Foreign Exchange Market. Using the closing prices of four major currency pairs for a period ranging from August 2008 to February 2018 for USD/INR and from February 2010 to February 2018 for other currency pairs (EURO/INR, GBP/INR and YEN/INR), the study employs Johansen Co-integration test, error correction estimates and granger causality test to identify the leading market and to predict the information efficiency among these two markets. The empirical results evidenced co-integrating relationship between spot and futures prices of USD/INR, EURO/INR and YEN/INR. The results of causality test signifies that spot and futures returns of USD/INR and GBP/INR shows bidirectional or two way causality relationship flow concluding that the both markets leads or influences to each other.