Real Exchange Rates and India’s Exports to United States : An Application of ARDL Approach

This paper examines both the long-run and short-run impact of real exchange rates and its volatility on India’s exports to United States by using autoregressive distributed lag (ARDL) bound test on quarterly data spanning from 1991Q1-2018Q4. The results of sensitivity analysis conducted by using ARDL bound testing approach confirm that India’s aggregate real exports are relatively more sensitive to the real exchange rates in the long-run but less responsive in the short-run. The study also reveals that economic activity has statistically significant and positively associated with the level of exports. However, the exchange rate volatility has an insignificant impact on India’s exports to United States. The empirical results failed to reject the null hypothesis of no short-run causality. Therefore, it is clear that exports in India are mainly caused by other factors, not by the real exchange rate volatility. The estimated coefficient of error correction term (ECT) is negatively and statistically significant at 5 percent level of significance, which indicates that the speed of adjustment towards long-run equilibrium is 24 percent within a quarter in responses to the disequilibrium caused by the previous period’s short-run shocks of explanatory variables on real exports. The study recommends that the Reserve Bank of India should consistently monitor the foreign exchange market to protect real exports from exchange rate volatility and try to moderate it whenever the exchange rate fluctuations breach a particular level