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Exchange rate volatility and exports from India: a commodity-level panel data analysis

Chandan Sharma (Department of Economics (BE), Indian Institute of Management Lucknow, Lucknow, India)

Journal of Financial Economic Policy

ISSN: 1757-6385

Article publication date: 12 June 2019

Issue publication date: 17 April 2020

514

Abstract

Purpose

This study aims to examine the relationship between exchange rate risk and export at commodity level for the Indian case.

Design/methodology/approach

The monthly panel data used for analysis are at a disaggregated level, which cover around 100 products, encompassing all merchandize sectors for the period spanning from 2012:12 to 2017:11. To measure the exchange rate volatility, the authors use real as well as nominal exchange rate concepts and predict the volatility of exchange rate using the autoregressive conditional heteroscedastic-based model. They use pooled mean group, mean group and common correlated effects mean group estimator that is suitable for the objectives and data frequency.

Findings

The empirical analysis indicates both short- and long-term negative effects of exchange rate variations on exporting. Specifically, in the long run, real exchange rate as well as nominal exchange rate volatility has significant effects on export performance, yet, the effects of uncertainty of nominal exchange rate is much severe and intense. In the short run, it is the nominal exchange rate uncertainty that hurts exports from India. Nevertheless, the short-run effect is much lesser than the long-run, supporting the argument that the short-term exchange rate risk can be hedged, at least partially, through financial instruments; however, uncertainty of the long-term horizon cannot be hedged easily and cost-effectively.

Practical implications

Reducing uncertainty and attaining stability in exchange rate and price level should be an important policy objective in developing countries such as India to achieve higher export growth, both in the short and long run.

Originality/value

Unlike previous studies, this paper tests the relationship using micro-level data and uses advanced econometric techniques that are likely to provide more precise information regarding the association between exchange rate volatility and trade flows.

Keywords

Citation

Sharma, C. (2020), "Exchange rate volatility and exports from India: a commodity-level panel data analysis", Journal of Financial Economic Policy, Vol. 12 No. 1, pp. 23-44. https://doi.org/10.1108/JFEP-11-2018-0157

Publisher

:

Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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