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