Mini-Case: Indian Rupee and Purchasing Power Parity (Note: This assignment follows the example of the mini-case on page 170 of the text).

Veritas Emerging Market Fund specializes in investing in emerging stock markets of the world. Mr. Henry Mobaus, an experienced hand in international investment and your boss, is currently interested in Indian stock markets. He has recently read articles and reports about India, such as an article in the Wall Street Journal, stating that "renewed confidence in the country's relative economic and political stability have made it an emerging-market haven in uncertain times." But, at the same time he is quite concerned about the possibility of volatile exchange rates. He would like to understand what drives Indian exchange rates. Since the inflation rate is somewhat higher in India than the United States, he thinks purchasing power parity may be holding, at least to some extent.

As a research assistant to Mr. Mobaus, you are assigned to check this out. In other words, you have to study and write a report on the following question. Does purchasing power parity hold for the Indian rupee- U.S. dollar exchange rate? Among other things, Mr. Mobaus would like you to complete the following analysis.

1. Plot past annual exchange rate changes against the differential inflation rates between India and the United States for the past 20 years. Include several sentences of commentary on what the graph illustrates. Please import or copy your graph from Excel, so that it is integrated into your report.

2. Regress the annual rate of exchange rate changes on the annual inflation rate differential to estimate the intercept and the slope coefficient, and interpret the regression results. Include several sentences of commentary on reporting and interpreting your regression results. Please import or copy your results from Excel so that they are integrated into your report.

3. Comment on other factors affecting the extent to which purchasing power parity might, or might not be expected to hold. Give an investment recommendation and state your reasoning (in the context of the Mini-Case) based on information you discover in Questions 1 and 2, AND on the latest press release issued by the IMF on the Indian economy. That is, do not simply discuss the graph and regression in your reasoning, but note all the factors discussed in the press release that should affect the price of the Indian rupee (anything that would be expected to shift the demand and/or supply for the rupee), and discuss their expected impact on the exchange rate. Think of this question as comprehensive over the material covered for both Exams 1 and 2.

Data sources: The annual inflation rates for India and the United States, as well as the exchange rate between the Indian rupee and the U.S. dollar are provided in an Excel file on Canvas. They are obtained from the following source: http://data.un.org. The IMF's press release on the Indian economy can be found at: http://www.imf.org/en/News/Articles/2017/02/22/PR1756-India-IMF-Executive-Board-Concludes-2017-Article-IV-Consultation.