Inter-Linkages between Movement of the Indian Rupee and BSE Sector-Specific (IT) Index : An Empirical Investigation

The paper analyses the relation between the movement of Indian rupee and movement of BSE IT sector index over the five-year calendar period (2009-2013) by taking monthly closing returns over the study period. The BSE IT Index is a sector-specific index of BSE and includes leading IT companies from India. The tools used for the purpose of studying this relation include Granger Causality (F Wald) restricted-unrestricted approach test which has been done bilaterally, Dickey-Fuller tests for stationarity of variables, Engle Granger Cointegration and Vector Error Correction Model to establish the long-term relation between the variables and variance decomposition of the error term. The model uses an autoregressive regression and has a number of lags and therefore optimal lag length has been determined using AIC and SIC criteria. The results of the study clearly show that BSE IT Index is causing movement in rupee, however, this is only from 4th lag onwards. On the other hand, the results could not establish a reverse relation or rupee causing movement in BSE IT Index for the period of study. The AIC and SIC results for model testing showed that the 4 lag model was the most appropriate model under study out of the 8 lags that were considered. The coefficient of the error term in ECM regression was negative, showing stable long-run equilibrium. Moreover, the result also showed that adjustment mechanism was backwards