Investigating the Impact of Exchange Rate Volatility, Inflation and Economic Output on International Trade of India

Abstract

Four models have been constructed separately for exports of goods, imports of goods, exports of services and imports of services to explore the impact of exchange rate volatility, inflation and economic output on India’s foreign trade. AutoRegressive Distributed Lag (ARDL) bounds test run on monthly data over the period of 2011–2020 reports that in the long run, growth in production positively impacts the trade in goods and services. Rise in level of prices negatively impacts the exports of goods. In the short run, a rise in volatility brings a decline in the imports of goods but in the long run, it has a positive impact on the exports of goods. Volatile exchange rate has no impact on trade in services. An increase in inflation in the short run leads to a rise in the imports of goods but brings a decline in the trade of services.

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