Calendar effects in USD-INR exchange rate

In a previous post, i looked at calendar effects in Indian markets using Nifty index data and concluded that end-of-month effect is very much alive in Indian markets.

The beauty of doing this analysis in a higher level language like R is that the work becomes easily reusable. Let's see if we can find some other nails to hit using this hammer. Such as - currencies.


The reference exchange rates between INR and  USD, Euro and JPY are available on RBI site. As of late 2008, retail investors can trade currencies on NSE and MCX-SX through their regular brokerage accounts.

Before we look at the data, let's look at conventional wisdom. Here is a newfeed from last week (26 January 2012) by Reuters which was picked up by ET, Mint and Moneycontrol.  Quoting:

The rupee fell on Wednesday as dollar demand from oil importers for month-end payments offset a rise in the local share market, ...
...
Oil is India's largest import item and oil refiners, the largest buyers of dollar in the local market, step up demand towards the end of every month to meet payment requirements.

Going by this, we would expect that rupee would depreciate toward the end of the month. Time for the evidence.

Let's first look at last 3 years when the currency markets were opened up for retail participation.

The chart below is that of  long Rupee trade i.e. what return you would have made by going long rupee (which is equivalent to short USD) on various calendar dates. Such a strategy would have lost money when rupee depreciated - remember, we are long rupee - and made money when rupee appreciated against dollar.

So, going by conventional wisdom, one would expect this strategy to lose money toward end of the month.

Wow. We find that rupee actually appreciates toward the end of the month.

Maybe market anticipates the oil dollar buying and moves ahead of it.
Or, maybe, this effect is related to end-of-month effect in Nifty i.e. FIIs bring in the money toward the end of the month lifting both the index and the rupee.
Or, maybe there is some other reason. All that is fodder for next few posts.

In any case, let's explore what happened in 2011 when rupee fell all the way from 45 level to 53 level? A long rupee strategy would have killed you, right? Right. Except, if you did it only during the last 3 days of the month and first 3 days of month. These turn-of-month days were still good in such a horrendous year.

Just in case you are interested, here is data for all of last 10 years: from 2002 to 2011.

Long live the calendar effects!