An empirical analysis of foreign trade capital on the nominal exchange rate in India
Mahesh Kumar Bagarti1, Suprava Sahu2
1Research Scholar, Ravenshaw University, Cuttack
2Asst. Prof Ravenshaw University, Cuttack
*Corresponding Author E-mail: bagartimahesh@gmail.com
ABSTRACT:
Abstract: This study is an endeavor to establish the relationship that subsists between trade and exchange rate in India. This study provides an empirical contribution to the subsisting literature which has been studied to date. The variables opted in this study include export, import of goods and accommodations, and exchange rate in India. All components of foreign trade are explanatory variables whereas the nominal exchange rate in India is taken to be the dependent variable. This study is mostly predicated on secondary data which have been sourced from RBI for a period of 30 years i.e. from 1991 to 2020. The nominal exchange rate in India i.e. US dollar to Indian rupee has been taken as the dependent variables. The method of the Multiple Regression model has been employed to examine the degree of relationship among the aforesaid variables. The findings of the study show that export and import paramount variables to expound the exchange rate in India. Export and import are paramount variables to expound the dependent variable. Most of the studies have focussed on ascertaining the impact of exchange rate on foreign trade both in developing as well as emerging economies as has been conspicuous from the review of past literature but this study has highlighted the consequentiality and consequentiality of foreign trade on the nominal exchange rate in India. This study contributes to the subsisting literature that if export increases then the exchange rate appreciates and vice versa. The regime of India should initiate measures to promote export in India which would stabilize the nominal exchange rate in India.
KEYWORDS: Foreign trade, nominal exchange rate, empirical, explanatory
1. INTRODUCTION:
1.1 Background of the study
International Trade is benign for all countries of the world. The benefits of specialization, division of labor, comparative cost, free trade, and open market are derived by nations in the process of international trade. Ergo international trade has gained paramount throughout the world.
Every country whether immensely colossal or diminutive, developed or developing, opulent or poor gains from international trade albeit the gains may vary from country to country. As Adam Smith points out in his Theory of International Trade that International Trade promotes international specialization and division of labor and Ricardo has pointed towards the comparative advantage relished by nations through international trade. Each country can specialize in the engendering of those goods in which it has a comparative advantage over other countries and goods and which is best suited to the geographical location and its natural resources. Even a country with poor resources and less raw material can gain from international trade if it specializes in the engendering of certain goods. International trade of goods and accommodations determines the relative exchange rate between two or more countries. International trade is fundamentally concerned with the kineticism of goods and accommodations across the border. The main component of international trade is the export and import of essential commodities and accommodations to and from a particular country. If the value of export is more than import then the exporting country receives foreign exchange which in turn increases its foreign exchange reserve and so as the value of the currency. If the value of import is more then that value of that currency depreciates against another currency. In the light of this proposition, the researcher is inquisitive to ken the impact of foreign trade in India on the exchange rate mechanism. since the value of export is less than import right from 1991 till date and the rupee value has been depreciating significantly over the designated duration.
1.2 Significance of the study:
The investigation of the swapping scale and its relationship with sundry factors acquired paramount consequentiality over the most recent couple of many years. It turns into a fundamental issue for experts just as scientists, concretely in agricultural nations, since 1972; because many agricultural nations acquired a shift their swapping scale strategy from fine-tuned to drifting conversion standard frameworks. Sundry examinations have been led to investigate the relationship of the conversion scale to exchange with coalesced outcomes. The examination in this space is yet dubious; in any case, there is an overall accedence among experts that over the long haul the exchange balance is affected by the conversion scale. Rose (1991) portrayed the genuine pace of the conversion scale as an immaterial variable to decide the exchange balance in the instance of five OECD nations. Mckenzie and Brooks (1997) discovered the presence of a huge positive relationship between instability in the conversion scale and exchange streams among Germany and the United States. Arize (1998) demonstrated that the unpredictability in the swapping scale and import streams are cointegrated on since quite a while ago run harmony just as related intently in their short-run elements on account of the United States. Ariccia (1998) tried the relationship of swapping scale vulnerability to bit-parallel exchange streams in Western Europe and showed a little yet the huge adverse consequence of conversion scale vulnerability upon unfamiliar exchange. Siddiqui and Akhtar (1999) reported the non-presence of a critical association between the pace of trade and home-grown costs. Vergil (2002) archived the presence of a negative yet huge effect of instability in conversion scale upon genuine fares in Turkey. Wilson and Tat (2001) revealed the non-critical impact of genuine conversion standards upon the genuine equilibrium of exchange among Singapore and the United States though little proof of J-bend has been found. The presence of cointegration among fares and imports has likewise been talked about by various analysts. Baharumshah (2001) documented the presence of steady just as the positive relationship of conversion standard to exchange balance since quite a while ago dissension the instance of Malaysia and Thailand having a two-sided exchange with the Amalgamated States and Japan. Baak (2008) archived the since a long time ago run relationship of swapping scale to trades volume among China and the United States yet the momentary relationship has not been identified. Bahmani-Oskooee and Cheema (2009) discovered the presence of positive too as the huge relationship of genuine conversion standard with the equilibrium of exchange for practically half of the example nations having a reciprocal exchange with Pakistan. A few investigations are showing the non-importance impact of swapping scale upon exchange balance. Jayachandran (2013) examined the impact of exchange rate on international trade in India for over a decade and he found out that exchange rate is a significant variable to explain foreign trade. Bahmani-Oskooee et al. (2016, 2017) and Arize et al. (2017) revealed that there is an asymmetric relationship between exchange rate and international trade. From the above literature, it is being evident that the impact of exchange rate on foreign trade has been studied in most cases whereas the impact of foreign trade on the exchange rate has not been studied to date in emerging economies like India. So, in the light of this proposition the researcher has opted to study this.
2 Objectives and Methodology of the study:
2.1 (i) To examine the impact of foreign trade on export and import on the exchange rate in India.
(iii) To find out the type of relationship that exists among the explanatory and dependent variables.
To fulfill the objectives, the following hypothesis has been formulated
HO: There is no impact of foreign trade export on the exchange rate in India.
H1: There is an impact of foreign trade export on the exchange rate in India.
HO: There is no impact of import on the exchange rate in India.
H2: There is an impact of import on the exchange rate in India.
2.2 METHODOLOGY:
The exchange rate annual data of import, export, and exchange rate have been sourced from RBI (Database on Indian Economy). The period of study ranges from 1991 till 2020 and it is an empirical analysis that is being explicated by the multiple regression model. This study takes into account import, export as the explanatory variables whereas exchange rate is taken to be the dependent variable. The exchange rate of the Indian rupee against the US dollar is considered to be the dependent variable. Import and export data in US dollar is assimilated from Handbook of Statistics, Database on the Indian economy. The annual value of the exchange rate has been accumulated from the Reserve Bank of India website for the aforesaid period. Statistical implements like multiple regression model augmented dickey fuller test, descriptive statistics, normality test have been employed to achieve the aforesaid objectives. The nominal exchange rate between India and the USA has been considered to study the pertinent objectives and hypothesis.
3 RESULTS AND ANALYSIS:
Table No.1 presents the summary statistics of the dependent and the explanatory variables of 30 optical discernments. The mean value and standard deviation of the exchange rate are computed to be 48.602 and 12. 684 respectively. The mean value of export is less than import which implicatively insinuates that import is more than export during these years.
Table No.2 states the degree of relationship that subsists among the following variables. There is a positive relationship between export, exchange rate, and import. If export changes then the exchange rate withal changes to the extent of 93% and if there is an import change then the dependent variable changes to the extent of 91%.
Table. No.3 reveals the goodness of fit of this study. The value of R square is 0.885 which betokens that the model is a very vigorous fit and around 88% of the data fortifies this proposition. It implicatively insinuates around 88% of the variance in the exchange rate is being expounded by the explanatory variables.
Table. No.4 reveals that there is no consequential difference in the exchange rate since the p-value is less than 0.05 so the null hypothesis is repudiated.
Table No. 5 denotes the model parameter of the exchange rate among the following variables. In both cases, the null hypothesis framed above is abnegated since the p-value is less than 0.05. Export and import are paramount variables to explicate the exchange rate in India.
Table No. 6 shows that coefficient value of -1.765 which betokens that if import increases then the exchange rate decreases and vice versa.
Table No. 7 reveals the data of peregrine trade and exchange rate in India over 30 years. It is conspicuous from the table that export is less than import and there is depreciation of Indian rupee.
Figure No. 1 shows that there is a positive relationship between exchange rate and peregrine trade in India whereas there is a negative relationship between exchange rate and import.
Table No.1 Summary statistics:
|
Variable |
Observations |
Obs. with missing data |
Obs. without missing data |
Minimum |
Maximum |
Mean |
Std. deviation |
|
Exchange Rate |
30 |
0 |
30 |
31.226 |
74.020 |
48.602 |
12.684 |
|
Export |
30 |
0 |
30 |
17865.4 |
330078.1 |
142850. |
120215.8 |
|
Import |
30 |
0 |
30 |
19410.5 |
514078.4 |
210840. |
187538.2 |
Source: Authors calculation using xlstat
Table No.2 Correlation matrix
|
Particulars |
EXPORT |
IMPORT |
Exchange Rate |
|
Export |
1 |
0.997 |
0.930 |
|
Import |
0.997 |
1 |
0.916 |
|
Exchange Rate |
0.930 |
0.916 |
1 |
Source: Authors calculation using xlstat
Table No.3 Goodness of fit statistics
|
Observations |
30 |
|
Sum of weights |
30 |
|
DF |
27 |
|
RČ |
0.885 |
|
Adjusted RČ |
0.877 |
|
MSE |
19.833 |
|
RMSE |
4.453 |
|
MAPE |
7.575 |
|
DW |
0.643 |
Source: Authors calculation using xlstat
Table No. 4 Analysis of variance (Exchange Rate):
|
Source |
DF |
Sum of squares |
Mean squares |
F |
Pr > F |
|
Model |
2 |
4130.024 |
2065.012 |
104.120 |
<0.0001 |
|
Error |
27 |
535.492 |
19.833 |
||
|
Corrected Total |
29 |
4665.516 |
|||
|
Computed against model Y=Mean(Y) |
|||||
Source: Authors calculation using xlstat
Table. No. 5 Model parameters (Exchange Rate):
|
Source |
Value |
Standard error |
t |
Pr > |t| |
The lower bound (95%) |
Upper bound (95%) |
|
Intercept |
33.231 |
1.421 |
23.382 |
<0.0001 |
30.315 |
36.147 |
|
Export |
0.000 |
0.000 |
3.280 |
0.003 |
0.000 |
0.000 |
|
Import |
0.000 |
0.000 |
-2.153 |
0.040 |
0.000 |
0.000 |
Source: Authors calculation using xlstat
Table. No. 6 Standardized coefficients (Exchange Rate):
|
Source |
Value |
Standard error |
t |
Pr > |t| |
The lower bound (95%) |
Upper bound (95%) |
|
Export |
2.690 |
0.820 |
3.280 |
0.003 |
1.007 |
4.373 |
|
Import |
-1.765 |
0.820 |
-2.153 |
0.040 |
-3.448 |
-0.083 |
Source: Authors calculation using xlstat
Figure No.1 Standardized coefficients
Source: Authors calculation using xlstat
Table No. 7 Foreign trade and Exchange rate
|
Year |
Export ($) |
Import ($) |
Exchange Rate |
|
1991 |
18145.2 |
24072.5 |
31.2256 |
|
1992 |
17865.4 |
19410.5 |
31.2354 |
|
1993 |
18537.2 |
21881.6 |
31.3725 |
|
1994 |
22238.3 |
23306.2 |
31.495 |
|
1995 |
26330.5 |
28654.4 |
34.35 |
|
1996 |
31794.9 |
36675.3 |
35.915 |
|
1997 |
33469.7 |
39132.4 |
39.495 |
|
1998 |
35006.4 |
41484.5 |
39.985 |
|
1999 |
33218.7 |
42388.7 |
42.435 |
|
2000 |
36822.4 |
49670.7 |
43.445 |
|
2001 |
44560.3 |
50536.5 |
43.595 |
|
2002 |
43826.7 |
51413.3 |
43.605 |
|
2003 |
52719.4 |
61412.1 |
43.755 |
|
2004 |
63842.6 |
78149.1 |
44.605 |
|
2005 |
83535.9 |
111517.4 |
44.645 |
|
2006 |
103090.5 |
149165.7 |
45.135 |
|
2007 |
126414.1 |
185735.2 |
46.64 |
|
2008 |
162904.2 |
251439.2 |
47.505 |
|
2009 |
185295.0 |
303696.3 |
48.8 |
|
2010 |
178751.4 |
288372.9 |
50.945 |
|
2011 |
251136.2 |
369769.1 |
51.16 |
|
2012 |
305963.9 |
489319.5 |
54.2323 |
|
2013 |
300400.6 |
490736.6 |
60.0998 |
|
2014 |
314415.7 |
450213.6 |
62.5908 |
|
2015 |
310352.0 |
448033.4 |
64.8386 |
|
2016 |
262291.1 |
381007.8 |
65.0441 |
|
2017 |
275852.4 |
384357.0 |
66.3329 |
|
2018 |
303526.2 |
465581.0 |
69.1713 |
|
2019 |
330078.1 |
514078.4 |
70.4 |
|
2020 |
313138.5 |
473995.2 |
74.02 |
Source: RBI Database on Indian Economy
4. CONCLUSION:
The above study concludes that there is a paramount relationship between exchange rate and export in India as against exchange rate and import. India has been experiencing a deficit trade balance since 1991 and the value of the rupee is additionally depreciating since then. In none of these years, export has exceeded import which is a cause of concern for emerging economies like India. If import increases then foreign exchange reserve decreases which in turn is depreciating the value of the Indian rupee since the coefficient value associated with the former variable is negative which implicatively insinuates if import increases exchange rate decreases significantly since they bear a negative relationship with each other.
5. RECOMMENDATION:
The study recommends that export should be given due paramount so that the exchange rate will be stabilized and foreign exchange reserve would increment. The Regime of India should initiate and implement several quantifications to promote more export to foreign countries which would result in an auspicious trade balance in the Balance of Payment position in India.
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Received on 29.05.2021 Modified on 20.06.2021
Accepted on 03.07.2021 ©A&V Publications All Right Reserved
Asian Journal of Management. 2021;12(4):447-451.
DOI: 10.52711/2321-5763.2021.00068