In this paper, the author has tried to build a univariate model to forecast the exchange rate of the Indian rupee in terms of different currencies like SDR, USD, GBP, Euro and JPY. This paper uses the Box-Jenkins Methodology of building the ARIMA model. Sample data for the paper was taken from March 1992 to June 2004, out of which data till December 2002 were used to build the model, while the remaining data was used to conduct out-of-sample forecasting and check the forecasting ability of the model. The data was collected from the Indiastat database. The paper shows that the ARIMA models provide a better forecasting of exchange rates than the simple autoregressive models or moving average models. The author was able to build a model for all the currencies except USD, which shows the relative efficiency of the USD currency market.

This paper is an attempt to forecast the exchange rate of the Indian Rupee (INR) in terms of five different currencies: SDR, USD, GBP, Euro and JPY. This paper tries to make short horizon forecasts based on univariate time series analysis. A survey of literature shows that a continuous debate is on as to whether exchange rate follows a random walk or provides room to be modeled, and whether one should use structural models or time series models to forecast exchange rate.

Forecasting exchange rate is important not only for firms having their business spread over different countries or firms planning to raise long or short-term funds from international markets, but also for firms confined to their entire business in the domestic market only, because a change in foreign exchange rate can change the business and the competition scenario for firms. Firms having exposure to foreign currencies are subject to two types of risk: Accounting Exposure1—which does not involve any cash flow but still can influence the profitability of a firm, and Cash Flow Exposure—which has a direct impact on the profitability of a firm by affecting its cash flow. Forecasting exchange rate is an important input in various corporate decisions like currency for invoicing, pricing decision, borrowing and lending decisions; and management of exposures and hedging strategies. The demise of the Bretton Woods system in 1973 gave rise to both the difficulty and desirability of obtaining reliableforecasts of exchange rates to earn income from speculative activities, in order to determine optimal government policies as well as to make business decisions.