Statistical Analysis of Foreign

Exchange Rate and Bank Rate

6/22/2017

Subodh Kumar
Table of Contents
1 ABSTRACT ..................................................................................................................................................... 2
1.1 Inflation ...................................................................................................................................................... 2
1.2 Bank Rate ................................................................................................................................................. 2
1.3 Speculation .............................................................................................................................................. 2
1.4 Change in competitiveness ............................................................................................................... 3
1.5 Balance of Payment ............................................................................................................................. 3
1.6 Government Debt .................................................................................................................................. 3
1.7 Government Intervention .................................................................................................................... 3
1.8 Economic Growth .................................................................................................................................. 4
2 TOPIC OF THE PAPER ............................................................................................................................. 4
3 BODY OF THE PAPER ............................................................................................................................. 4
3.1 Hypothesis Considered For Study.................................................................................................. 4
3.2 Null and Alternative Hypothesis....................................................................................................... 5
3.3 Data Sample............................................................................................................................................ 5
3.4 Decision..................................................................................................................................................... 5
3.5 Regression Analysis ............................................................................................................................. 6
3.6 Regression Statistics Table ............................................................................................................... 6
3.7 ANOVA Table ......................................................................................................................................... 6
4 SUMMARY OR CONCLUSION ................................................................................................................ 7
5 REFERENCE ............................................................................................................................................... 7
6 PREPARED DATA ..................................................................................................................................... 8
7 ABOUT THE AUTHOR ............................................................................................................................ 13

1
1 Abstract
Foreign exchange rate is the value of one currency in another currency.

Due to globalization, the importance of stable foreign exchange rate for a country is of utmost
importance.

Forex exchange rates are determined by many factors, some of them are given below.

1.1 Inflation
When the inflation in a country is low, the produce from that country is supposed to be more
competitive. This will help make better export from the country, at the same time the imports will be
costly. People across the world will buy products from that country which will lead to demand for its
currency which in turn will lead to appreciation in the value of the currency.

Inflation

Foreign Exchange Rate

1.2 Bank Rate

A bank rate is the interest rate at which a nation's central bank lends money to domestic banks,
often in the form of very short-term loans. Managing the bank rate is method by which central banks
affect economic activity. Lower bank rates can help to expand the economy leading to appreciation
in foreign exchange rate.

Bank Rate reflects interest rate in a country. When the interest rate in a country is high, people will
deposit money in that country to get better returns. So, the demand for the currency shall increase;
this in turn will increase the value of the currency.

Bank Rate

Foreign Exchange Rate

Interest Rate

Foreign Exchange Rate

1.3 Speculation
Sometimes market sentiments drive the foreign exchange rate. E.g. after BrExit the value of Sterling
Pound crashed against leading currencies. This happened due to negative market sentiment about
UK that it would no longer be an attractive financial hub.

2
 Speculation

Foreign Exchange Rate

1.4 Change in competitiveness

Change in competitiveness can increase due to many factors like increased productivity, cheap
labour and business friendly laws by the government etc.

Demand for currency rises which leads for appreciation in currency value.

Change in Competitiveness

Foreign Exchange Rate

1.5 Balance of Payment

Balance of payment is also termed as current account deficit. When a country imports more than its
export and does not have enough capital inflows to finance the current account deficit then the
value of the currency will depreciate.

Current Account Deficit

Foreign Exchange Rate

1.6 Government Debt

When the value of the government debt exceeds expected limit, market fears for government
default. This can lead to pulling investment out of the country by investors leading to depreciation in
value of the currency.

Government Debt

Foreign Exchange Rate

1.7 Government Intervention

Sometimes government of a country tries to keep value of its currency low to keep its goods
competitive in the market.

Government Intervention

Foreign Exchange Rate

3
1.8 Economic Growth
It has been observed that a country having good GDP growth attracts FDI. FDI can lead to
appreciation in value of currency.

Similarly, at the time of recession, the value of currency goes down as there is less demand for
currency due to poor business prospect. Government increases the supply of money through QE
(Quantitative Easing) into the system which leads to depreciation in value of the currency.

Economic Growth

Foreign Exchange Rate

Economic Growth

Foreign Exchange Rate

2 Topic of the paper

As explained in above section, foreign exchange rate is influenced by interest rate. In this paper, the
author is trying to perform statistical analysis using multiple linear regression on three data series as
given below.

1. Independent Variable: Bank Rate in India

2. Independent Variable: Bank Rate in UK
3. Dependent Variable: GBP/INR rate

The objective of this paper is to perform statistical test whether there is some relationship between
independent variable and the dependent variables using multiple regression analysis.

3 Body of the paper

In this section, we shall perform multiple regression analysis on following variables.
1. Independent Variable: Bank Rate in India from Aug-1998
2. Independent Variable: Bank Rate in UK from Aug-1998
3. Dependent Variable: GBP/INR rate from Aug-1998

3.1 Hypothesis Considered For Study

This section explains the hypothesis testing concepts.

4
3.2 Null and Alternative Hypothesis
Following hypothesis has been considered for this study.
1. Regression Line can be represented by following

2. Data description
Y = GBP/INR exchange rate

= Bank Rate in UK

= Bank Rate in India

= Standard Error

3. Null Hypothesis:
a. There is no relationship between the dependent variable and independent variables

b.

4. Alternative Hypothesis:
a. There is some relationship between the dependent variable and independent
variables. The dependent variable can be predicted using the independent variables

b.

3.3 Data Sample

The data considered for study in this paper is assumed to be normally distributed. The sample data is
collected from internet.

Following approach has been taken to collect the data.

Bank Rate collected from RBI site has weekly rates. Monthly Bank Rate has been derived as
average of four weeks Bank Rates captured
Bank Rate collected from Bank of England site is on daily basis. Monthly Bank Rate has been
derived as average of Bank Rates captured for a given month

3.4 Decision
P-value is used to make decision for hypothesis testing in this paper.

For current hypothesis testing, we take = 0.05 as significance level. It is to be noted that significance
level (alpha or ) is the probability of rejecting the null hypothesis when it is true. The author is willing
to falsely reject null hypothesis (H0) 5% of the time.

5
So, we have following decision rule.

1. Reject the null hypothesis when p<=

2. Accept the null hypothesis when p>

3.5 Regression Analysis

Microsoft excel is used to perform the multiple regression analysis.

3.6 Regression Statistics Table

The following table is derived from the excel.

Regression Statistical Name Comment

Statistics Data
Multiple R 0.582265273 Pearsons correlation coefficient Strong Relationship
R Square 0.339032849 Coefficient of determination Moderate
Adjusted Coefficient of Moderate
Adjusted R Square 0.333024056 determination
Standard Error 8.239464511 Standard Error of Regression Moderate
Observations 223

Following points can be explained from the above table.

Multiple R: It is used in statistics to measure how strong a relationship is between the

independent variable and the dependent variable. The range of the correlation coefficient is
from -1 to 1.
R Square: It gives you an idea of how many data points fall within the results of the line formed
by the regression equation. It ranges between 0 to 1; 1 means all the data points lie on
regression line and 0 means none of the points lie on the regression line.
Adjusted R Square: It has similar meaning as R square. It shows more sensitivity when some
data points are added in sample.
Standard Error: It is a measure of how spread out the dependent data points are around the
mean, . The standard error of the regression slope also called the standard error of estimate
represents the average distance that your observed values deviate from the regression line.
The smaller the value of standard error, the better is the regression line
Observation: No of sample data points taken for study

3.7 ANOVA Table

The following ANOVA table is derived from the excel.

6
ANOVA
df SS MS F Significance F
Regression 2 7660.948766 3830.474383 56.42279 1.65877E-20
Residual 220 14935.5306 67.88877543
Total 222 22596.47936

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 68.14503176 3.584614759 19.0104199 2.55E-48 61.08045294 75.20961057 61.08045294 75.20961057
India Bank Rate 2.563218087 0.470598553 5.446719018 1.37E-07 1.635759828 3.490676347 1.635759828 3.490676347
UK Bank Rate -1.900987527 0.248507742 -7.649610872 6.24E-13 -2.390747975 -1.411227078 -2.390747975 -1.411227078

Following points can be explained from the above table.

The value of value for Significance F = 1.65877E (-20). This is much less than = 0.05. So, we
can reject the null hypothesis
Also, if we see the p-value for Intercept i.e. Beta-0, independent variables India Bank Rate
(Beta1) and UK Bank Rate (Beta2) are all less that = 0.05. Using this information, we can
reject the null hypothesis.
The regression line can be written as follows
GBP/INR Exchange = 68.145 + 2.563 * India Bank Rate + (-1.900) * UK Bank Rate
The regression line indicates that the GBP/INR exchange rate is positively proportional to India
Bank Rate whereas it is negatively proportional to UK Bank Rate

We also see that and

4 Summary or Conclusion
The focus for this article is to study whether Bank rate has some relationship with foreign exchange
rate.

After performing multiple regression analysis on the sample data, we have found statistical
measurement to reject the null hypothesis.

This concludes that statistically there is some relationship between foreign exchange rate and bank
rate.

5 Reference
https://www.rbi.org.in/Scripts/WSSViewDetail.aspx?TYPE=Section&PARAM1=4
http://www.bankofengland.co.uk/boeapps/iadb/index.asp?Travel=NIxRPx&From=Repo&C=13T&G
0Xtop.x=1&G0Xtop.y=1
http://www.statisticshowto.com/multiple-regression-analysis/
http://cameron.econ.ucdavis.edu/excel/ex61multipleregression.html
http://www.excel-easy.com/examples/regression.html
https://onlinecourses.science.psu.edu/statprogram/node/139
http://www.statisticshowto.com/what-is-an-alpha-level/

7
http://support.minitab.com/en-us/minitab-express/1/help-and-how-to/basic-
statistics/inference/supporting-topics/basics/what-is-a-test-statistic/
http://blog.minitab.com/blog/adventures-in-statistics-2/regression-analysis-how-to-interpret-s-the-
standard-error-of-the-regression
http://www.statisticshowto.com/excel-regression-analysis-output-explained/
http://www.statisticshowto.com/find-standard-error-regression-slope/
http://www.investopedia.com/terms/b/bankrate.asp

6 Prepared Data
Month India Bank UK Bank Rate GBP/INR
Rate
Aug-98 9 7.5 71.548
Sep-98 9 7.5 72.065
Oct-98 9 7.306818182 70.976
Nov-98 9 6.821428571 70.145
Dec-98 9 6.416666667 70.251
Jan-99 9 6.0375 69.928
Feb-99 9 5.575 68.394
Mar-99 8 5.5 68.304
Apr-99 8 5.2875 68.903
May-99 8 5.25 68.689
Jun-99 8 5.079545455 68.432
Jul-99 8 5 70.292
Aug-99 8 5 69.753
Sep-99 8 5.193181818 71.872
Oct-99 8 5.25 71.37
Nov-99 8 5.465909091 69.396
Dec-99 8 5.5 70.388
Jan-00 8 5.6625 70.494
Feb-00 8 5.916666667 68.861
Mar-00 8 6 69.415
Apr-00 7 6 67.745
May-00 7 6 66.925
Jun-00 7 6 67.743
Jul-00 7.25 6 67.552
Aug-00 8 6 66.317
Sep-00 8 6 67.88
Oct-00 8 6 67.836
Nov-00 8 6 66.861
Dec-00 8 6 69.81
Jan-01 8 6 67.892
Feb-01 7.875 5.8125 67.23
Mar-01 7 5.75 66.135

8
Apr-01 7 5.539473684 67.089
May-01 7 5.321428571 66.66
Jun-01 7 5.25 66.604
Jul-01 7 5.25 67.153
Aug-01 7 5.011363636 68.507
Sep-01 7 4.8875 70.555
Oct-01 6.875 4.532608696 69.797
Nov-01 6.5 4.113636364 68.262
Dec-01 6.5 4 70.136
Jan-02 6.5 4 68.433
Feb-02 6.5 4 68.969
Mar-02 6.5 4 69.55
Apr-02 6.5 4 71.316
May-02 6.5 4 71.263
Jun-02 6.5 4 74.929
Jul-02 6.5 4 76.06
Aug-02 6.5 4 75.124
Sep-02 6.5 4 75.846
Oct-02 6.5 4 75.642
Nov-02 6.25 4 75.224
Dec-02 6.25 4 77.262
Jan-03 6.25 4 78.764
Feb-03 6.25 3.7875 74.914
Mar-03 6.25 3.75 75.175
Apr-03 6.25 3.75 75.657
May-03 6 3.75 76.944
Jun-03 6 3.75 76.785
Jul-03 6 3.576086957 74.342
Aug-03 6 3.5 72.342
Sep-03 6 3.5 75.838
Oct-03 6 3.5 76.824
Nov-03 6 3.7125 78.834
Dec-03 6 3.75 81.47
Jan-04 6 3.75 82.549
Feb-04 6 3.9625 84.445
Mar-04 6 4 80.017
Apr-04 6 4 79.117
May-04 6 4.223684211 83.303
Jun-04 6 4.420454545 83.645
Jul-04 6 4.5 84.405
Aug-04 6 4.714285714 83.476
Sep-04 6 4.75 83.209
Oct-04 6 4.75 83.323
Nov-04 6 4.75 85.037

9
Dec-04 6 4.75 82.979
Jan-05 6 4.75 82.207
Feb-05 6 4.75 83.88
Mar-05 6 4.75 82.548
Apr-05 6 4.75 82.884
May-05 6 4.75 79.435
Jun-05 6 4.75 77.908
Jul-05 6 4.75 76.326
Aug-05 6 4.534090909 79.387
Sep-05 6 4.5 77.532
Oct-05 6 4.5 79.792
Nov-05 6 4.5 79.387
Dec-05 6 4.5 77.452
Jan-06 6 4.5 78.142
Feb-06 6 4.5 77.665
Mar-06 6 4.5 77.339
Apr-06 6 4.5 82.025
May-06 6 4.5 86.588
Jun-06 6 4.5 84.775
Jul-06 6 4.5 86.841
Aug-06 6 4.727272727 88.523
Sep-06 6 4.75 85.731
Oct-06 6 4.75 85.676
Nov-06 6 4.931818182 87.65
Dec-06 6 5 86.406
Jan-07 6 5.170454545 86.573
Feb-07 6 5.25 86.593
Mar-07 6 5.25 84.871
Apr-07 6 5.25 82.055
May-07 6 5.428571429 79.969
Jun-07 6 5.5 81.437
Jul-07 6 5.715909091 81.543
Aug-07 6 5.75 81.963
Sep-07 6 5.75 81.178
Oct-07 6 5.75 81.594
Nov-07 6 5.75 81.279
Dec-07 6 5.539473684 78.239
Jan-08 6 5.5 78.106
Feb-08 6 5.297619048 79.319
Mar-08 6 5.25 79.374
Apr-08 6 5.079545455 80.376
May-08 6 5 83.576
Jun-08 6 5 85.547
Jul-08 6 5 84.273

10
Aug-08 6 5 79.903
Sep-08 6 5 83.495
Oct-08 6 4.608695652 79.267
Nov-08 6 3.225 76.299
Dec-08 6 2.142857143 71.058
Jan-09 6 1.595238095 70.913
Feb-09 6 1.075 72.99
Mar-09 6 0.568181818 72.444
Apr-09 6 0.5 73.543
May-09 6 0.5 76.261
Jun-09 6 0.5 78.623
Jul-09 6 0.5 79.966
Aug-09 6 0.5 79.248
Sep-09 6 0.5 76.398
Oct-09 6 0.5 77.156
Nov-09 6 0.5 76.564
Dec-09 6 0.5 74.983
Jan-10 6 0.5 73.823
Feb-10 6 0.5 70.305
Mar-10 6 0.5 68.062
Apr-10 6 0.5 67.61
May-10 6 0.5 67.415
Jun-10 6 0.5 69.428
Jul-10 6 0.5 72.784
Aug-10 6 0.5 72.254
Sep-10 6 0.5 70.032
Oct-10 6 0.5 71.1
Nov-10 6 0.5 71.23
Dec-10 6 0.5 69.758
Jan-11 6 0.5 73.4
Feb-11 6 0.5 73.592
Mar-11 6 0.5 71.403
Apr-11 6 0.5 73.921
May-11 6 0.5 74.132
Jun-11 6 0.5 71.728
Jul-11 6 0.5 72.596
Aug-11 6 0.5 74.444
Sep-11 6 0.5 76.395
Oct-11 6 0.5 78.343
Nov-11 6 0.5 81.811
Dec-11 6 0.5 82.372
Jan-12 6 0.5 78.005
Feb-12 7.75 0.5 78.18
Mar-12 9.5 0.5 81.466

11
Apr-12 9.25 0.5 85.489
May-12 9 0.5 86.327
Jun-12 9 0.5 87.198
Jul-12 9 0.5 87.093
Aug-12 9 0.5 88.105
Sep-12 9 0.5 85.448
Oct-12 9 0.5 86.785
Nov-12 9 0.5 86.944
Dec-12 9 0.5 89.079
Jan-13 9 0.5 84.478
Feb-13 8.75 0.5 82.468
Mar-13 8.63 0.5 82.554
Apr-13 8.5 0.5 83.388
May-13 8.25 0.5 85.999
Jun-13 8.25 0.5 90.565
Jul-13 9.25 0.5 92.548
Aug-13 10.25 0.5 101.906
Sep-13 9.88 0.5 101.308
Oct-13 9.125 0.5 98.861
Nov-13 8.75 0.5 102.132
Dec-13 8.75 0.5 102.345
Jan-14 8.80 0.5 103.026
Feb-14 9 0.5 103.479
Mar-14 9 0.5 100.006
Apr-14 9 0.5 101.82
May-14 9 0.5 99.163
Jun-14 9 0.5 102.736
Jul-14 9 0.5 102.254
Aug-14 9 0.5 100.454
Sep-14 9 0.5 100.427
Oct-14 9 0.5 98.233
Nov-14 9 0.5 97.349
Dec-14 9 0.5 98.177
Jan-15 8.85 0.5 93.455
Feb-15 8.75 0.5 95.167
Mar-15 8.5 0.5 92.303
Apr-15 8.5 0.5 97.524
May-15 8.5 0.5 97.466
Jun-15 8.25 0.5 99.918
Jul-15 8.25 0.5 99.975
Aug-15 8.25 0.5 101.896
Sep-15 8.25 0.5 99.12
Oct-15 7.75 0.5 100.941
Nov-15 7.75 0.5 100.069

12
 Dec-15 7.75 0.5 97.584
Jan-16 7.75 0.5 96.709
Feb-16 7.75 0.5 94.918
Mar-16 7.75 0.5 95.152
Apr-16 7.15 0.5 97.07
May-16 7 0.5 97.305
Jun-16 7 0.5 89.854
Jul-16 7 0.5 88.158
Aug-16 7 0.284090909 87.989
Sep-16 7 0.25 86.366
Oct-16 6.75 0.25 81.65
Nov-16 6.75 0.25 85.789
Dec-16 6.75 0.25 83.846
Jan-17 6.75 0.25 84.927
Feb-17 6.75 0.25 82.609

7 About the author

Author Name : Subodh Kumar
Education : B.E. from NIT, Jamshedpur
Executive management program from XLRI, Jamshedpur
Designation : Senior Domain Consultant
Division : Banking
Experience : 12+ years in IT industry
Areas of interest : AML-KYC, Commercial Lending, Risk

13