Relationship between Exchange Rate and Sovereign Bon Yield - An Empirical Analysis

The relation between the exchange rate of USD/INR and India's Sovereign bond yield is the subject of the study. With the objective of examining the long term & short term relationship, we examined the long term relationship by cointegration test and short term relation by Granger causality test from the period of January 2003 to January 2014. Before the investigation of cointegration & Granger causality, the descriptive statistical test and Unit root test for stationary is done through ADF and PP test. The cointegration test results revealed there is a long term relationship between Exchange rate and Sovereign bond and the Granger causality test results revealed exchange rate of USD/INR does not cause the 10 Yr Sovereign bond yield, but 10 Yr Sovereign bond yield causes the exchange rate of USD/INR uni-directionally. The results show clearly that there is a unidirectional causal relationship between exchange rate of USD/INR and India's Sovereign bond yield in India