Understanding the Causal Association of Exchange Rate of The Pound Sterling and Yen on Indian Rupee

Indian rupee is claimed as to be a `market determined ex-change rate’. Usually, Indian rupees per unit are very much influenced by the changes in the exchange rates of yen and pound Sterling. The present paper explores the causal association between pound Sterling and yen and its impact on the Indian rupees per unit for the period starting from 1970–71 to 2014–15 using yearly data. The present paper has been premeditated with the application of unit root test, Johansen cointegration test and Granger causality test. Two indicators of exchange rate of the Indian rupees per unit, to be exact, the Pound Sterling and yen have been used for the purpose of the study. Johansen cointegration test result indicates that there exists a long-term relationship among the selected variables. Granger causality test result shows that there must be either bidirectional or no causality among the variables.