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Exchange Rate Volatility and Trade Balance: An Indian Study

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  • Nikhil Rastogi

Abstract

The exchange rate of a country has a major impact on its level of trade. In the era of currency convertibility, volatility of exchange rate seems to largely affect the level of trade or trade balance. However, the presence of hedging instruments could neutralize this effect.This study is an attempt to find the relationship between the trade balance of India and the exchange rate volatility. It has taken quarterly data from January 1993 to March 2004. REER (Real Effective Exchange Rate) is used for the purpose of determining exchange rate volatility. The study uses two measures of volatility to find out its impact on trade balance. It concludes that during the said period, volatility in the currency has failed to have an impact on the trade balance of India. Also, there exists no lagged impact of exchange rate on the trade balance of India, which proves that the J-curve effect is not observed here.

Suggested Citation

  • Nikhil Rastogi, 2005. "Exchange Rate Volatility and Trade Balance: An Indian Study," The IUP Journal of Bank Management, IUP Publications, vol. 0(2), pages 54-59, MAY.
    • Handle: RePEc:icf:icfjbm:v:04:y:2005:i:2:p:54-59
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