Dynamic Relationship between Exchange Rate of BRICS Countries: Causality and Co Integration Analysis

>Exchange rate is an important element of the country’s economic health. Exchange rate fluctuations affect the value of international investment portfolios, Competitiveness of exports and imports, value of international reserves, currency value and balance of payment. In the past few decades, some large economies such as Brazil, Russia, India, China, and South Africa (BRICS) have acquired a vital role in the world economy as producers of goods and services, receivers of capital, and as potential consumer markets. The aim of this study is to explore the dynamic relationship between the FXR of BRICS nations using time series data running from 1991-92 to 2017-18. Our paper measures the volatility from the changes in the foreign exchange rate of emerging market economies and analysis the Co integration, Granger Causality analysis, variance decomposition analysis and impulse response function. In this research, Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests are applied to test stationarity of data and the data was found stationary at first difference. Karl Pearson correlation test was used to find the correlating relationship between foreign exchange rates of BRICS nations are significantly correlated with each other. Johansen’s cointegration test is applied to determine the long-run equilibrium relationship between the study variables. Granger causality test is employed to determine the causality and often adopted the local projections approach to derive impulse response functions and variance decomposition analysis, variance decompositions serve as tools for evaluating the dynamics interactions and strength of causal relations among variables in the system. We find that the co-integration test confirmed that FXR of BRICS nations are co integrated, indicating an existence of long run equilibrium relationship. The Granger causality test confirmed the presence of two way causality between FXR India and FXR Brazil. The results further indicate that there is one way causality between FXR Russia <= FXR INDIA and FXR South Africa <= FXR India. The empirical results of both variance decomposition analysis and impulse response function exhibits that foreign exchange rate of BRICS nation are not independent each other.