© 2018 IJSRSET | Volume 4 | Issue 7 | Print ISSN: 2395-1990 | Online ISSN : 2394-4099

Themed Section : Engineering and Technology

The Impact of Exports and Imports on Exchange Rates in

India
Dr. Abhishek Kumar,
Assistant Professor,
Kydc Rahimapur Jhushi Allahabad

ABSTRACT

In the era of a globalized world, the interdependence amongst countries in terms of international trade of goods
and services and capital flows has increased considerably. There is a considerable change in the trade
composition of the developing countries with a magnificent shift from exporting commodity to manufacturing
product exports. This change in the trade composition has made the developing countries terms of trade more
stable, but its exports are becoming more sensitive to exchange rate fluctuations. This study empirically
examines the impact of India’s export and import on exchange rate using time series data for the period from
January 2006 to October 2015 This study finds that there is positive relationship between export and exchange
rate but negative relationship between import and exchange rate. Also, finds that the change in export will
influence in positive changes in Indian Rupee against Euro, Pound, Dollar and Yen. But, Import is not
positively influence on exchange rate between Euro, Dollar, Pound and Yen.
Keywords: Export, Import, Exchange Rate, Relationship, Granger Causality

INTRODUCTION

In open economies, the policies of foreign exchange rate are some of the most important macroeconomic
indicators, because the world’s investment decisions are affected by them. Also the success of the policy is
affected by the effect of foreign exchange rates on imports and exports, in terms of a reduction in the foreign
trade deficit. Today, the trends in the world economy as well as the movement of goods and services, labor,
technology and capital throughout the world, regardless of the geographical boundaries, affect the economies of
countries. Trade transactions involving more than one region normally require the conversion of a currency to
another currency. The purpose of this research is to determine the impact of exchange rates on the imports and
exports of emerging countries. The intention of this research was to develop an empirical study which will
illustrate the nature of the relationship between imports-exports and exchange rates. The movement in
exchange rates will be assumed to be as a result of exchange rate policies. Additionally, it is a chance for the
researcher to apply theoretical knowledge to a practical situation through critical and robust methodologies as
described by Iqbal, Khalid &Rafiq (2011) and Bhattarai (2011). In the next section, the literature review is

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 summarized with the objective of gaining adequate knowledge of the subject under research. In the literature,
there have been several studies indicating the relation between exchange rate and foreign trade i.e. Export and
import. However, this study differentiates from previous studies in two aspects. First, foreign exchange rate has
been used as a dependent variable, in this study the foreign exchange rate was used as an indicator that
considers inflation differences, as well. Second, although most of studies in the literature investigate the effect
of foreign exchange rates on the foreign trade balance, in this study the effect of foreign exchange rates on
imports and exports were analyzed separately. In the second part of the study similar studies in the literature
and different opinions are mentioned. In the third part, information about the empirical methodology and data
are given and the empirical results are evaluated.

DATA AND METHODOLOGY

This study uses time series data. The main objective of study is to examine whether the import or export effect
the exchange rate (USD, EURO, POUND and YEN) in India. The monthly exchange value of EURO, POUND,
DOLLAR and YEN as well as EXPORT and IMPORT has been used for the study. The data period is from
January 2006 to October 2015. All-time series contains total of 118 observations. The data are collected from
database of Reserve Bank of India and SEBI.

Time series annual macro data on Exports (Y) and Imports (X) from 1949-50 to 2004- 05 in nominal terms
required to provide empirical content to the objectives of the study have been collected from the Economic
Survey [Ministry of Finance, Economic Division] 2005-06 and Basic Statistics relating to the Indian
Economy ,reserve Bank of India]The long run equilibrium relationship between India’s exports [Y] and imports
[X] has been looked at by using annual macro time series data for the period from 1949-50 to 2004-05. The
method in analyzing the long run equilibrium relationship between India’s exports and imports requires the
determination of the integration order of each variable. This shall be accomplished by unit root testing of the
macro time series variables. The unit root test provides the information about the presence/absence of
stationary of the time series variables in levels or first difference If the time series variables, exports and imports,
are not stationary in levels, then the series contain unit root. The estimates of economic relationships based on
OLS method in the presence of unit root in the levels will be fly-by-night. The non-stationary time series data
on exports and imports require to be differenced until stationary has emerged. The popular methods to detect
the presence/absence of unit root and for determining the order of integration of each variable, exports and
imports are the Augmented Dicky Fuller test and Phillips-Perron test. The order of integration of each time
series variable needs to be established first. Briefly stated, a time series variable such as Y and X [exports and
imports ] is said to be integrated of order d if it is found stationary after differenced d times. This is generally
denoted by [Y] ~ I(d) and [X] ~ I(d). According to Engel and Granger representation, the two variables Yand X,
despite the fact that they are non-stationary in levels, are said to be co integrated, if the residuals from the co
integration regression [linear combination] are integrated of any order less than d. For instance, if [Y] ~ I(1) and
[X] ~ I (1), the residuals from the co integration regressions of Y on X or X on Y have to be I (0) in order to have
co integration between Y and X . Then there will be long run equilibrium relationship between Y and X. In the
short run there may be disequilibrium between actual value of Y [ or X ] and long run equilibrium values. An

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 Error Correction Modeling helps to examine the presence of equilibrium or disequilibrium in the short run.
Further, the estimate of error correction term explains the extent of disequilibrium that can be
eliminated/corrected at each period

CONCLUSION
The present empirical exercise is to perceive the presence of long run equilibrium relationship between India’s
exports and imports. The empirical evidence based on ADF and PP unit root tests illustrate that the aggregate
exports and imports are stationary in first log difference. The estimates based on cointegration and error
correction modeling show that India’s exports and imports are co integrated showing the existence of long run
equilibrium relationship between them during 1949-50 to 2004-05

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