Volatility Behaviour and Spillover Effect: Evidence from Indian Foreign Exchange Market

The study aims to analyze the volatility behaviour and its spillover effect on Indian foreign exchange rates Indian Rupee (INR), specifically against the Euro (EUR), British Pound (GBP), Japanese Yen (JPY) and US Dollar (USD). The study is based on the Reserve Bank of India (RBI) data from January 2019 to June 2023. A statistical approach suitable for capturing the dynamics of volatility over time, allowing for both short-term and long-term effects, is used. Additionally, a method designed to examine returns, shocks and volatility spillover effects, due to its flexibility in capturing asymmetry in volatility among foreign exchange rates, is employed. The empirical findings show that USD/INR is the most volatile and JPY/INR is the least volatile. As for the spillover effect, it is found that there is a bidirectional volatility linkage between the USD and EUR, suggesting that both currencies have a significant impact on the volatility of the INR exchange rate. This study’s impact goes beyond academic circles, directly influencing real-world practices of hedgers, arbitrators and other market players.