Impact of exchange rate fluctuations on India's foreign trade

Abstract

Foreign exchange plays a vital role in the country's foreign trade. Foreign Exchange Rates and Foreign Trade are interrelated with each other and thus one variable has an impact on another in one way or other. The present paper studies impact of Exchange Rate fluctuations on India's Foreign Trade. The study used monthly time series data of Exchange Rates and India's Foreign trade for the period of 18 years. It was analyzed with the aid of econometric tools like Unit-root test, co-integration, VECM and Granger-Causality. The result stated that there is a long run co-integration between Exchange rate and India's foreign trade, and there is a unilateral causality between the Exchange Rate and India's Foreign Trade. The study concludes that the past values of India's Foreign trade are more likely to forecast future value of the Exchange rates for the short term. There exists a long run relationship between the exchange rates and India's Foreign Trade.