Price Discovery Mechanism in FX Market of India

Identifying and managing risk is essential for reducing vulnerabilities from exchange rate movements which might negatively affect profit margins. With regard to emerging Indian FX market this paper attempts to look at the interaction between the spot prices and futures contracts in India for three different currency contracts viz., GBP/INR, JPY/INR and EUR/INR so as to comprehend the long run relationship and causality using co-integration and Grangers causality test for a period spanning from February 2010 to December 2019. The results shows there is one co-integrating vector in the stated currency pairs and bi-directional causality in JPY/INR and one way causality for GBP/INR and EUR/INR.