Investigating the factors that affect Indias currency value and

obtaining an equation to predict the rupee value for the next financial
quarter
Under the guidance of
Mr. Justin Sebastian IBDP Coordinator and Economics Teacher
and
Mr. S.K. Maholtra - Mathematics Teacher

Advait Kaushik
The Cathedral and John Connon School

Research Abstract
This paper aimed to investigate the factors that affect the currency value of India, and obtain a regression
equation to predict the value of Indias currency for the quarter ending in June, 2016. Based on preliminary
analysis, 5 main factors were selected under the scope of this study. Data for 12 quarters was procured for
each of the factors. Through correlation, several factors were ranked on the basis of their effect on Indias
currency value, with the base criterion being 0.25. After this, a linear regression analysis was run to obtain
the required equation with the minimum qualifier being 0.05. In order to finally predict the currency
value for the June quarter, another 7 linear regression analysis were performed, with each variable being
expressed as a function of time. Using these equations, a value for each of the variables influencing the
currency was predicted. Using these values, I finally arrived at Indias currency value for June 2016
. 66.18. The actual value of Indias currency was . 67.51. The model thus had an accuracy of . %.
The number of regressions run could have contributed to this error. Furthermore, the regressions run were
linear the accuracy might have improved had non-linear regression been run. In conclusion, the model was
fairly accurate, and provided a valuable insight into the several factors that affected Indias currency value.

TABLE OF CONTENTS
1. Abstract

2. Introduction

3. Methodology

a.

Definition of Key Terms

4. Raw Data

5. Correlation Analysis

6. Regression Analysis

7. Further Investigation

a.

Balance of Trade

i.

Balance of Trade: World

ii.

Balance of Trade: USA

iii.

Balance of Trade: Saudi Arabia

iv.

Balance of Trade: Iraq

v.

Balance of Trade: Hong Kong

10

vi.

Balance of Trade: Singapore

10

vii. Balance of Trade: Others

10

b.

Repo Rate

10

c.

Other Factors

11

8. Final Prediction

11

9. Evaluation and Limitations

12

10. Conclusion

12

11. Acknowledgements

13

12. Works Cited

13

1. Introduction
The value of a nations currency is of utmost importance to individuals, economists, and the world as a whole.
Ever since the barter-system was replaced, currency became the basic unit of trade. From an individualistic
perspective, the currency of a nation has huge implications on its citizens determining how much they can
spend, import, or even exchange for when they travel. Economically speaking, the value of a nations
currency is linked to its trade with other countries, the value of the interest rates in the country, the
governments debt, and also the rate of inflation.
An unduly strong currency can exert a significant drag on the underlying economy over the long term by
rendering industries uncompetitive. Surprisingly, a weak currency can sometimes create more economic
benefits by stimulating exports, thereby decreasing a nations trade deficit. If the domestic currency
depreciates, exporters can offer goods abroad that are more competitively priced. However, a stronger
currency will reduce export competitiveness and make imports cheaper, causing the trade deficit to widen. 1
Several economic crises have started due to fluctuations in currency value such as the Asian Crisis of 199798. Due to speculative attack from other economies, the Central Bank of Thailand had to devalue its currency
the Baht and allow its value to fluctuate based on the market. 2 Further, concerns in the European Union
today, amidst the Brexit has led to a depreciation in both the Euro and the British Pound. 3
Being a citizen of India, I was curious to know the factors the affected the rupee value, and wanted to
mathematically weigh these factors, and then be able to predict the currency value of our country. I realized
that I could combine my love and passion for Mathematics and Economics to create a statistical model that
can achieve this seemingly herculean task.

2. Method

In order to determine what factors affect the currency value a nation, I conducted secondary research via the
internet and scholarly articles. The major determinants that were found are: 4
1.
2.
3.
4.

Rate of inflation
Rate of interest/ Repo rate
Net exports (balance of trade)
Political stability and economic performance

However, to extend the scope of the analysis, I wanted to test the effect of other variables on the currency of
an economy, such as:
5. Gross Fiscal Deficit
6. Primary income
Seeing as the political stability of an economy isnt mathematically measureable, I decided to procure data for
the other five items. The time period chosen for this analysis is June 2012 March 2016, representing 12
financial quarters. This gives the analysis enough data, while ensuring that the data isnt too spaced out in
order to maintain validity.

Investopedia. "Effects Of Currency Fluctuations On The Economy." Investopedia. 13 Feb. 2016. Web. 11 Aug. 2016.
<http://www.investopedia.com/video/play/effects-currency-fluctuations-economy/>
2
Investopedia Staff. "The Effects Of Currency Fluctuations On The Economy." Investopedia. 6 Aug. 2013. Web. 11 Aug. 2016.
<http://www.investopedia.com/articles/forex/080613/effects-currency-fluctuations-economy.asp>
3
Ibid.
4
Bergen, Jason Van. "6 Factors That Influence Exchange Rates." Investopedia. 4 May 2004. Web. 2 Aug. 2016.
<http://www.investopedia.com/articles/basics/04/050704.asp>

The data was obtained from Edelweiss, one of Indias leading financial services group. 5 I verified this data
as much as possible using various online websites and forums.

a. Definition of Key Terms

TERM
Inflation
Consumer Price Index (CPI)

Rate of Interest
Repo Rate
Balance of Trade
Gross Fiscal Deficit
Primary Income

DEFINTION
Inflation is the sustained increase in the average price level of an
economy
The CPI is a measure that examines the weighted average of prices of a
basket of consumer goods and services in an economy. Weighting the
goods according to their importance to the average consumer, the CPI
is calculated by taking prices for each item from a basket of goods and
averaging their price. 6
This is the rate at which banks lend money to consumers and investors
This is the rate at which the central bank of a country (Reserve Bank of
India, in this case) lends money to commercial bank in the event of any
shortfall of funds 7
The balance of trade of an economy is the difference between its exports
and imports
The difference between a governments total revenue and its total
expenditure. Per convention, it calculated quarterly 8
Primary income refers to the income received by an individual or entity
for their contribution to the production process

The effect of each variable on the currency value of a nation will be tested numerically through a correlation
analysis, and then determined using regression analysis. It will be qualitatively discussed and explained in the
Further Investigation section.

3. Raw Data

The following are the items listed in columns, along with their applicable units:
1. USA Balance of Trade - $ Billions
2. Saudi Arabia Balance of Trade - $ Billions
3. Iraq Balance of Trade - $ Billions
4. World Balance of Trade - $ Billions
5. Repo Rate - %
6. Hong Kong Balance of Trade - $ Billions
7. Singapore Balance of Trade - $ Billions
8. Primary Income $ Billions
9. Consumer Price Index Ratio with Base year of 2012
10. Indias Gross Fiscal Deficit Rupee Millions
11. Indias Currency Value Rupee/Dollar




5

Edelweiss. "Online Trading | Share/Stock Market Online, Stock Trading in India | Stock Brokers | Edelweiss.in." Edelweiss. n.d.
Web. 2 Aug. 2016. <https://edelweiss.in/>
6
Root. "Consumer Price Index - CPI." Investopedia. 19 Nov. 2003. Web. 2 Aug. 2016.
<http://www.investopedia.com/terms/c/consumerpriceindex.asp>
7
The Economic Times. "Definition of' 'Repo Rate' - The Economic Times." The Economic Times. n.d. Web. 2 Aug. 2016.
<http://economictimes.indiatimes.com/definition/repo-rate>
8
The Economic Times. "Definition of' 'Fiscal Deficit' - The Economic Times." The Economic Times. n.d. Web. 2 Aug. 2016.
<http://economictimes.indiatimes.com/definition/fiscal-deficit>

Iraq
BT

World
BT

Repo
Rate

3.847

Saudi
Arabia
BT
-6.107

Singapore
BT

Primary
Income

CPI

8.000

Hong
Kong
BT
1.102

Currency

10.037

Gross
Fiscal
Deficit
634866.67

-4.606

-41.780

1.695

-4.9

Sep-12

2.293

-5.585

-4.921

-48.808

8.000

0.988

1.972

-5.6

11.230

488146.67

52.86

Dec-12

1.570

-6.151

-4.251

-54.957

8.000

0.887

1.230

-5.8

10.820

225983.33

54.995

Mar-13

3.551

-5.977

-5.375

-43.502

7.500

1.388

1.178

-5.2

12.637

284970.00

54.28

Jun-13

3.711

-5.248

-5.298

-47.458

7.250

0.983

2.477

-4.8

11.213

876076.67

59.39

Sep-13

3.785

-6.010

-4.659

-29.174

7.500

1.524

2.217

-6.3

12.697

497550.00

62.6175

Dec-13

4.169

-7.007

-4.317

-30.356

7.750

1.277

0.530

-5.4

14.773

347673.33

61.8

Mar-14

5.057

-6.027

-4.252

-28.686

8.000

1.699

0.529

-6.4

8.810

-45090.00

59.89

Jun-14

5.331

-5.502

-4.479

-33.493

8.000

1.909

1.370

-6.4

8.460

992863.33

60.1862

Sep-14

5.980

-4.419

-4.104

-39.413

8.000

2.323

0.282

-6.6

7.880

469890.00

61.7575

Dec-14

4.486

-3.971

-3.251

-38.883

8.000

1.860

1.048

-5.5

3.587

311850.00

63.0437

Mar-15

4.853

-3.045

-2.407

-26.019

7.500

1.940

-0.014

-5.6

6.450

-71880.00

62.4975

Jun-15

4.960

-4.372

-3.342

-32.571

7.300

1.777

0.160

-5.9

5.433

955650.00

63.65

Sep-15

5.163

-3.519

-2.972

-35.538

6.800

1.480

-0.496

-5.5

3.340

306226.67

65.5125

Dec-15

4.408

-3.308

-2.580

-31.555

6.800

0.995

0.767

-6.4

5.910

365406.67

66.1537

Mar-16

4.539

-2.720

-1.926

-18.367

6.800

1.732

0.077

-6.6

5.790

147220.00

66.2475

Quarter
ended
Jun-12

USA
BT

56.8075

4. Correlation Analysis
Correlation is a statistical technique that determines whether or not there is a relationship between two
variables, and how strongly those two pairs of variables are related. 9 The main result of the correlation test is
the value of the correlation coefficient. A positive value of indicates a positive relation between
two variables as one increases, so does the other. A negative value of indicates the opposite. The closer
the absolute value of to 1, the greater the correlation. However, correlation does not determine causation
just because there is a relationship between two variables does not mean that the value of one variable
determines the value of the other.
The raw data shown previously consisted of 11 variables, and was processed through a correlation analysis
using Microsoft Excel. As currency value was the dependent variable, it was appropriately positioned in the
last column. The data in excel is expressed as part of a correlation matrix it shows the correlation between
each of the number of pairs listed. Further, the diagonal of the matrix always consists of the number one
due to a correlation between each variable and itself. 10
USA
BT
USA BT
Saudi
Arabia
BT
Iraq BT
World BT
Repo
Rate
Hong
Kong BT
Singapore
BT
Primary
Income
CPI
Gross
Fiscal
Deficit
Currency

Saudi
Arabia
BT

Iraq
BT

World
BT

Repo
Rate

Hong
Kong
BT

Singapore
BT

Primary
Income

CPI

Gross
Fiscal
Deficit

1.000
0.448

1.000

0.408
0.645
-0.197

0.857
0.451
-0.630

1.000
0.645
-0.553

1.000
-0.434

1.000

0.798

0.384

0.347

0.528

0.123

1.000

-0.578

-0.568

-0.740

-0.532

0.360

-0.516

1.000

-0.404

-0.295

-0.410

-0.535

0.080

-0.502

0.330

1.000

-0.527
0.059

-0.852
-0.219

-0.778
-0.405

-0.328
-0.278

0.386
0.060

-0.448
-0.080

0.610
0.447

0.265
0.165

1.000
0.109

1.000

0.680

0.685

0.778

0.759

-0.641

0.438

-0.581

-0.447

-0.633

-0.086

Currency

1.000

The last row is the one that is integral to this analysis as it gives the correlation between the 11 independent
variables and the currency value. In order to maintain statistical validity, only the variables that had an absolute
value of of at least 0.25 were processed through the regression analysis.
Interestingly, the only variable that didnt fulfill this requirement is the Gross Fiscal Deficit with an
value of 0.086. Thus, the regression analysis was conducted between 10 independent, and 1 dependent
variable.

N.a. "Correlation - Statistical Techniques, Rating Scales, Correlation Coefficients, and More - Creative Research
Systems." Surveysystem.com. 22 Oct. 2015. Web. 31 Jul. 2016. <http://www.surveysystem.com/correlation.htm>
10
N.a. "Correlation." Socialresearchmethods.net. n.d. Web. 31 Jul. 2016.
<http://www.socialresearchmethods.net/kb/statcorr.php>

5. Regression Analysis
Regression is a way of describing how one variable the outcome is numerically related to predictor
variables. 11
When testing regression, there are two hypotheses available:
1) The null hypothesis (9 ) that there is no cause-and-effect relationship between two variables. In
this case, for each variable, the null hypothesis would be that it does not affect the currency value of
India.
2) The alternative hypothesis (: ) this is the hypothesis one would believe if the null hypothesis is
proved to be untrue. In this case, the alternative hypothesis for each variable is that it does indeed
affect the currency value of India.
The value, or calculated probability, is the probability that the null hypothesis is true. The smaller the
value, the more likely your null hypothesis is untrue.
A statistically significant value of is < 0.05, whilst a statistically highly significant value is < 0.001.
The raw data was run through the regression analysis using Microsoft Excel, and the results are shown below:
Intercept
USA BT
Saudi Arabia BT
Iraq BT
World BT
Repo Rate
Hong Kong BT
Singapore BT
Primary Income
CPI

Coefficients
96.67373133
3.189548978
-4.325221789
7.838929902
-0.306951645
-8.286399558
5.225953561
4.21125534
-0.015331661
0.0518387

P-value
0.000270629
0.014576457
0.017074751
0.007146904
0.061496838
0.010097022
0.087668434
0.016320571
0.984513421
0.857729653

The values of Primary Income and CPI were high enough to accept their null hypotheses.
The regression was conducted once again, excluding those two variables.

Intercept
USA BT
Saudi Arabia BT
Iraq BT
World BT
Repo Rate
Hong Kong BT
Singapore BT

Coefficients
95.3160117
2.6754245
-3.8602989
7.0874625
-0.2326480
-7.3489961
4.5550421
3.4789721

P-value
0.0000012
0.0016012
0.0033950
0.0006189
0.0278824
0.0015945
0.0493984
0.0026066

As one can see, all the variables have a value < 0.05, ensuring that they are statistically significant.
Thus, the following equation for the currency value was obtained:

11

N.a. "Regression and Correlation Methods in StatsDirect." Statsdirect.com. 24 Jul. 2016. Web. 31 Jul. 2016.
<http://www.statsdirect.com/help/default.htm#regression_and_correlation/regression_and_correlation.htm%3FTocPath%3DRegre
ssion%2520and%2520correlation%7C_____0>


= . . + . . . + . + . + .
Where:
= USA BT
= Saudi Arabia BT
= Iraq BT
= World BT
= Repo Rate
= Hong Kong BT
= Singapore BT

6. Further Investigation

Interestingly, Indias trade with Iran seems to have the maximum correlation with its currency value. It is
important to fully understand why so. Similarly, several other factors emerged that have a large enough
influence on the rupee value. This section investigated those factors, explaining exactly why they might have
affected the currency value.

a. Balance of Trade

As mentioned earlier, a countrys balance of trade is the difference between its exports and imports. A positive
balance implies that its exports exceed its imports, whilst a negative balance implies the opposite. If the
country is experiencing a budget surplus, i.e. a positive balance of trade, there is a high demand for its goods,
and thus its currency. As per the laws of demand and supply, when demand is high, prices rise; the price of a
currency is its value, and thus the value of that currency would rise.
It is important to note that currency exchange rates are quoted with respect to other values; the price of one is
described in terms of another. As per convention, most currencies quote their rates with respect to the US
dollar. 12
This model is true when one considers floating exchange rates the exchange is solely determined by market
forces. 13
In Indias context, the Reserve Bank of India (RBI) sets a fixed rupee value on the basis of their view on the
net-demand and supply for the rupee. As of July 14th, 2016, this value was 66.91 against the US dollar. 14
i.

Balance of Trade: World

Indias balance of trade has historically remained negative. However, recent trends indicate that this may be
proved untrue in the coming years, with Indias trade balance becoming less and less negative. In fact, the
balance of $. in March 2016, when compared to the $. in June 2012
indicates a . % decrease in our trade balance.
Since the 1980s, due to the large growth of imports of crude oil, gold and silver, India has maintained a
deficit. However, under the new government, India seems to be tending towards a more self-sufficient

12

Investopedia. "How does the balance of trade impact currency exchange rates?." Investopedia. 15 Apr. 2015. Web. 1 Aug.
2016. <http://www.investopedia.com/ask/answers/041515/how-does-balance-trade-impact-currency-exchange-rates.asp>
13
Ibid.
14
Desikan, Aparna. "RBI sets rupee reference rate at 66.91 against US dollar - Times of India." The Times of India. 14 Jul. 2016.
Web. 1 Aug. 2016. <http://timesofindia.indiatimes.com/business/india-business/RBI-sets-rupee-reference-rate-at-66-91-againstUS-dollar/articleshow/53216447.cms>

economy. The largest deficits were maintained with China, Saudi Arabia, Iraq, Switzerland and Kuwait,
whilst surpluses were recorded with the United States, United Kingdom, Germany and Singapore. 15
The correlation of Indias balance of trade with the world and its currency value is +. , indicating that
as the deficit reduces, our value strengthens following the principle explained above.
ii.
Balance of Trade: USA

India has maintained a positive trade balance with the United States of America. Indias main imports from
the United States of America were precious stones diamonds and gold, aircraft and machinery electrical,
optical, mechanical. Further, agriculture also formed an integral part of the imports. 16 As of 2013, India was
the United States 10th largest supplier of goods. 17 The main exports to the USA include but are not limited
to mineral oils, organic chemicals, pharmaceutical products and diamonds. 18

The extent of the trade surplus has varied quite drastically since June 2012, but on average, has increased by
. % as of March 2016.
The USA has also been Indias largest export partner with a total of $. from June 2012
March 2016.
Further, the positive correlation . leads one to believe that with the growing surplus, our currency value
might increase in the coming quarters.

iii.
Balance of Trade: Saudi Arabia

Saudi Arabia has remained Indias 2nd largest import partner over the years, with a total of $.
from June 2012 March 2016.The balance of trade has remained negative, with the exports seemingly near
as high as the imports.
This could be due to Indias need for petroleum oil, with that being Saudi Arabias main export.19 Further,
Arab trade with India dates back to the 3rd century, with Arab merchants maintaining a monopoly over spice
trade with India then! India has also imported iron and steel from Saudi in the recent past.
However, it is important to note that the trade deficit with Saudi Arabia has decreased over the years further
pointing to Indias desire to be self-reliant with a decrease of . %. The trade deficit also explains the
negative correlation of . .

iv.
Balance of Trade: Iraq

Indias 6th largest import partner, Iraq is known for its crude oil supplies. Due to the elastic supply of oil, this
may have an adverse impact on Indias economy, as seen in 1991 during the Gulf War. Further, post 2003,
Indias relations with Iraq have declined. 20 21

15

N.a. "India Balance of Trade | 1957-2016 | Data | Chart | Calendar | Forecast." Tradingeconomics.com. n.d. Web. 1 Aug. 2016.
<http://www.tradingeconomics.com/india/balance-of-trade>
16
N.a. "India | United States Trade Representative." Ustr.gov. n.d. Web. 1 Aug. 2016. <https://ustr.gov/countries-regions/southcentral-asia/india>
17
Ibid.
18
Ibid.
19
N.a. "." Eximbankindia.in. 1 Aug. 2015. Web. 1 Aug. 2016. <http://www.eximbankindia.in/sites/default/files/indiasinternational-trade-and-investment.pdf>
20
Google Books. "Indian Economy." Google Books. n.d. Web. 2 Aug. 2016.
<https://books.google.co.in/books/about/Indian_Economy.html?id=CFZNtijhaB8C>
21
N.a. "." Mea.gov.in. 6 Nov. 2013. Web. 2 Aug. 2016. <https://mea.gov.in/Portal/ForeignRelation/India-Iraq_Relations.pdf>

With India importing from Iraq, its balance of trade with them is negative. However, as stated previously, the
trade deficit has fallen . % in the last four years.
Interestingly though, the correlation between Indias trade deficit with Iraq and its currency value was the
highest, at . . Further, despite having a trade deficit with Iraq, the correlation is positive as India
imports less and less from Iraq, its currency value strengthens.

v.
Balance of Trade: Hong Kong

Hong Kong isnt Indias largest trade partner, but its net exports with India still has a significantly high
correlation with Indias currency value +. .
Historically, bilateral relations between the two countries have been strong, with India importing electric
machinery and non-metallic minerals from Hong Kong, while exporting jeweler and leather. 22 In April
2016, Hong Kong expressed an interest in importing consumer electronics from India; this could see Indias
exports increase, potentially increase the rupee value. 23
Despite the change in trade over the last four years not changing much, the trade has fluctuated with a range
of almost $. .

vi.
Balance of Trade: Singapore

Indias trade relationship with Singapore is strengthened by the fact that they are both ASEAN countries
Singapore is Indias 5th largest export partner. Numerically speaking however, the trade between the two
nations isnt that high, with Indias exports to Singapore $ , about a third of its exports to the USA.
Despite this, there is a significant negative correlation of . that Indias trade with Singapore has with its
currency. The negative correlation is interesting, seeing as India has managed to maintain a trade surplus with
Singapore for 10 of the 12 financial quarters studied. The negative correlation could be explained by the fact
that Indias trade surplus has decreased on average over the quarters, by . % - India is barely maintaining
the surplus.
There are positive signs however, with the Indian government announcing numerous plans to increase trade
with Singapore, including a new Smart City Project. 24
vii.

Balance of Trade: Others

India has large amounts of trade with several other economies however, due to the scope of this research,
not all of them could be studied in detail. In fact, China, Indias biggest import partner, was left out of this
study, due its low correlation with Indias currency value.

b. Repo Rate
As mentioned earlier, the repo rate is the rate at which the central bank lends money to commercial banks. A
higher repo rate represents a higher cost of borrowing for commercial banks, which leads to them borrowing
less money from the RBI. Thus, their supply of money decreases, which leads to a marginally higher rate of
interest. This is will incentive foreign to deposit money into Indian banks, in order to receive the benefits of a

22

N.a. "Trade and Industry Department: Publications." Tid.gov.hk. 23 Apr. 2012. Web. 2 Aug. 2016.
<https://www.tid.gov.hk/english/aboutus/publications/factsheet/india2011.html>
23
The Indian Express. "Hong Kong eyes consumer electronic part imports from India." The Indian Express. n.d. Web. 2 Aug.
2016. <http://indianexpress.com/article/business/economy/hong-kong-eyes-consumer-electronic-part-imports-from-india/>
24
Pti. "India, Singapore decide to scale up trade ties." The Hindu. 16 Aug. 2014. Web. 3 Aug. 2016.
<http://www.thehindu.com/news/national/external-affairs-minister-sushma-swaraj-visit-to-singapore-india-singapore-decide-toscale-up-trade-ties/article6324029.ece>

higher interest rate. This increases the demand for the rupee, and increases its value. Conversely, a lower repo
rate would lead to a fall in the rupee value. A fall in the rupee value would correspond to a higher rupee rate
against the dollar. Thus, one should expect to see a negative correlation between the repo rate and the rupee
value.
The correlation is negative at . . Further, the coefficient of the repo rate value in the regression
equation above is also negative pointing to an inverse relationship between the value of the rupee and the
value of the repo rate. The repo rate has decreased by % over 12 quarters, whilst the rupee value against
the dollar has increased by . %

c. Other factors

There are several other factors that affect a countrys currency value. The factors studied in this paper are only
a small component of all possible factors chosen on the basis of their correlation. For example, inflation in
a country would decrease its export competitiveness, and thus decrease the demand for its currency lowering
its value against the dollar.

7. Final Prediction

In order to predict the value of the rupee for the June 2016 quarter, we need to have the values of the variables
that affect the rupee. Instead of procuring this from the internet, I decided to predict each variable using its
own individual regression equation.
For this regression, time would be the dependent variable. However, given that each month in every year is
important, I scaled the value of each quarter as follows:
Month, Year
Scaled Value Month, Year
Scaled Value
June, 2012
25
September, 2014
250
September, 2012
50
December, 2014
275
December, 2012
75
March, 2015
300
March, 2013
100
June, 2015
325
June, 2013
125
September, 2015
350
September, 2013
150
December, 2015
375
December, 2013
175
March, 2016
400
March, 2014
200
June, 2014
225
Using the regression function on excel, the following regressions were obtained and predicted their
respective values as follows:

Variable
USA BT
Saudi BT
Iraq BT
World BT
Repo Rate
Hong Kong BT
Singapore BT

Regression equation
= 0.006 + 2.89
= 0.009 6.91
= 0.008 5.55
= 0.056 48.24
= 0.003 + 8.12
= 0.002 + 1.10
= 0.005 + 2.08

Predicted Value (at 425)

5.57
2.96
2.29
24.5
7.03
1.18
0.17

Where =
Thus, each of the individual values were plugged into the original equation as follows:

 = 2.68 3.86 + 7.09 0.23 7.35 + 4.56 + 3.48 + 95.31

= 2.68 5.57 3.86 2.96 + 7.09 2.29 0.23 24.5
7.35 7.03 + 4.56 1.18 + 3.48 0.17 + 95.31
= .
The predicted value of the model for the quarter ending in June 2016 was . . . The actual value of the
rupee at that point in time was . . .25
Thus, the model had an error of . % a relatively low margin.

8. Evaluation and Limitations

There are several limitations to this study, the first of which is the low number of variables tested for their
influence on the rupee value. In any regression equation, the more number of variables, the lower the error
value. However, as stated previously, this study included only those variables that had a significantly high
correlation with the rupee value, and a significantly low . Further, it is interesting that we could
obtain a regression equation for the rupee value eliminating variables such as Chinas trade with India
another example of how unpredictable the field of mathematics is.
Due to my limited knowledge of economics, there could be other important variables that perhaps werent
tested for their impact on the rupee.
The model obtained for the rupee value is a linear model. The tools available to me couldnt run non-linear
regression to predict the rupee value, and perhaps the error margin could have been lowered if non-linear
regression was used. This could explain the low of some important variables.
Further, in addition to the linear, 7-variable model created for currency, I also created 7 additional linear
models, in order to predict the value of each variable that affects the currency of India. This could have led to
additional errors, the errors in each equation must have combined.
Despite this, with an error of 1.97%, the error margin for the model isnt high at all.

9. Conclusion

Through this research paper, I was able to predict the value of the Indian rupee, with an error of around 2%.
This paper gave me an insight to the limitations of mathematical models, but also made me realize how much
more scope there is for analysis I plan to attempt creating another model, once Ive learnt more mathematics
and economics. The use of a linear model was an inhibiting factor, but one that can easily be fixed.
This model also shows how dependent India is on some of its trade partners, through their effect on our
currency.

25

N.a. "US Dollar to Indian Rupee Exchange Rate (Market Daily, INR to 1 USD)." Ycharts.com. n.d. Web. 6 Aug. 2016.
<https://ycharts.com/indicators/indian_rupee_exchange_rate>

10.

Acknowledgements

I would like to thank Mr. S.K. Malhotra IB Mathematics Higher Level teacher for his unstinting support
and encouragement, and pushing me beyond known boundaries while I wrote this research paper.
A big thank you also to Mr. J. Sebastian IBDP Coordinator and Economics teacher for his assistance and
invaluable inputs.

11.

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N.a. "." Eximbankindia.in. 1 Aug. 2015. Web. 1 Aug. 2016. http://www.eximbankindia.in/sites/default/files/indias-internationaltrade-and-investment.pdf

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