Covered Interest Rate Arbitrage Parity (CIRAP) and ‘Efficiency' of Foreign Exchange (Rupee/Dollar) Market in India – Time Series Econometric Study with Forward Rates and ARIMA Forecasts

Abstract

The study is devoted to examining the ‘efficiency' of Indian foreign exchange (rupee/dollar) market and the relevance of Covered Interest Rate Arbitrage Parity (CIRAP) doctrine therein over the period 11^th November, 2011- 27^th February, 2015. ARIMA (4, 1, 0) stochastic structure of monthly spot rate (S_t) has been used to generate one – period ahead forecast ( ) series. These forecasts are MMSE forecasts and ‘Rational' by nature. Forward rates ( ) served as the ‘Unbiased predictor' of the spot rate  implying that CIRAP did hold well in the market. Again absence of ‘risk premium' testifies for the ‘efficiency' of the Indian foreign exchange (rupee / dollar) market over the period of study.