Exchange Rate Behaviour of Indian Rupee in A Controlled Foreign Exchange Regime:A Cointegration Approach

Whenever a currency is subject to control regarding its exchange rate and trading, a parallel market develops and a second exchange rate, popularly known as black market rate, is established in the market. The interaction of this with the official rate is conditioned by the domestic fiscal and monetary policies and international scenario. The co-movement of these two rates reflects the nature and the degree of the disequilibrium of domestic economy. The nature of this relationship in a historical perspective has been explored in this paper by using a sophisticated econometric approach.