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Direction of Trade, Exchange Rate Regimes, and Financial Crises: The Indian Case

In: Analytical Issues in Trade, Development and Finance

Author

Listed:
  • Rajendra Narayan Paramanik

    (University of Hyderabad)

  • Bandi Kamaiah

    (University of Hyderabad)

Abstract

This chapter focuses on the direction of trade (DOT) of India with its selected major 25 trade partners during the years 1997–1998 to 2009–2010 with the help of the empirically acclaimed and successful gravity model of trade. To address issues like heterogeneous impact of the trading partners on the trade volume of India, the panel-corrected standard error (PCSE) model has been used. Apart from the influence of traditional factors like gross domestic product (GDP), population, and spatial distance (proxy for transaction cost), significant impacts of the financial crises and exchange rate regimes of the trading partners are tested. The expected positive roles of GDP and population of India as well as its trade partners have been vindicated. However, the negative impact of distance is not statistically discernible. Two major financial crises (Asian crisis in 1998 and the recent meltdown in 2008) that occurred during this phase played havoc in terms of their impact on India’s trade relation. Though, in absolute terms, advanced nations with freely floating exchange rate system trade more with India, a proportional impact of the nations with fixed exchange peg or exchange rate arrangement with no legal tender has been found to be more prominent.

Suggested Citation

  • Rajendra Narayan Paramanik & Bandi Kamaiah, 2014. "Direction of Trade, Exchange Rate Regimes, and Financial Crises: The Indian Case," India Studies in Business and Economics, in: Ambar Nath Ghosh & Asim K. Karmakar (ed.), Analytical Issues in Trade, Development and Finance, edition 127, chapter 6, pages 87-96, Springer.
    • Handle: RePEc:spr:isbchp:978-81-322-1650-6_6
    DOI: 10.1007/978-81-322-1650-6_6
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