Impact of Exchange Rate Fluctuations on India’s Manufacturing Exports: An Empirical Investigation on Long-Run Relation

Abstract

After the collapse of the fixed exchange rate system of Bretton Woods, the fluctuations of exchange rate and its impact on macroeconomic performance and trade in countries around the world are becoming an increasing debate among researchers and policymakers. This study empirically investigates whether fluctuations in real exchange rate may affect real exports in the Indian context. The study has employed autoregressive distributed lag (ARDL) bound test procedure to analyse the long-run relationship among variables using quarterly data from 2005Q1 to 2017Q4. The results of the ARDL bound test reveal that real exports are cointegrated with relative prices, real exchange rate volatility and world real GDP. The study has found negative but insignificant impact of exchange rate volatility on exports, but world GDP as a proxy of foreign economic activity and real effective exchange rate as relative prices have positive and statistically significant impact on Indian manufacturing exports. Further, the ARDL short-run error correction model implies that while the model may temporarily deviate from its long-run equilibrium, the deviations adjust towards the equilibrium level in the long run. JEL Codes: F01, F31, F14

Asymmetric Exchange Rate Effects on Trade Flows in India

“…There have also been India-specific studies. Panda and Mohanty (2015) find that exchange rate volatility hurts Indian exports, as does Tripathi (2021), although the impact is not statistically significant. Cheung and Sengupta (2013) show that rupee changes have a bigger impact on firms with small export shares and Tripathi (2021) finds that the exchange rate has a bigger impact on manufacturing goods.…”

“…Panda and Mohanty (2015) find that exchange rate volatility hurts Indian exports, as does Tripathi (2021), although the impact is not statistically significant. Cheung and Sengupta (2013) show that rupee changes have a bigger impact on firms with small export shares and Tripathi (2021) finds that the exchange rate has a bigger impact on manufacturing goods. This paper builds on these studies and the previous literature by combining these various drivers of exports and imports and analyzing them through the lens of time and sectoral differences.…”

“…Thus, the sign for the differential effect for high-volume sectors (exvol) is ambiguous. Based on Tripathi's (2021) findings, the exchange rate is expected to have a smaller impact on primary goods (prim).…”

The Long Run Impact of Exchange Rate and Inflation on GDP: A Panel Data Approach Consistent with Data from Brazil, Russia, India, China, And South Africa (BRICS)

“…However, there are additional global factors that have a positive and considerable impact on Indian manufacturing exports, such as world GDP and real effective exchange rates. The complex interaction of variables emphasizes the subtle nature of the correlation between exchange rates and GDP in various global contexts (Jyoti, 2021). Overall, the effect of exchange rates on GDP is a complex phenomenon that requires a detailed analysis, taking into account not just the direction but also the magnitude and importance of the interactions involved.…”