Foreign Exchange Risk Management: Review of Exchange Rate Forecasting Models for use of Banks & its Customers in India

Movement in Indian Rupee versus US Dollar exchange rate has significant impact on the decision making of exporters, importers, bankers, businesses, financial institutions, policymakers, investors, NRIs and tourists. The movement in exchange rate generates volatility which results in risk to the concerned entity. Several models given by researchers have tried to find the forecasting models which can help the entities to reduce the risk associated with currency movements after successfully forecasting the movement of currency rates. In this paper we have tried to review the books/literature on several foreign exchange forecasting models and more specifically models to forecast exchange rate of USD vs Indian Rupee. The reviewed papers have mentioned different methodology used by authors including Box-Jenkins Methodology of building ARIMA model, bi-variate analysis, fundamental analysis etc. The paper also mentions the need for the appropriate model for exchange rate forecasting for the use of customer as well as bankers and other market players of foreign exchange market. The paper also finds further scope for determining the appropriate model for the use of banks and customers. Forward premium data of last 15 years have been studied to find scope for a fresh model which can reasonably forecast the USD/INR rates in short term. The daily USD/INR data since 2001 have been used from the database of RBI towards achieving the findings and discussions of the paper in addition to average monthly/yearly data since 1947 for other purposes.