International macroeconomics: Theoritical and empirical study of relationship betweeen movement in rupee and trade balance

Abstract

It is widely believed that weak exchange rate will stimuli exports. Many emerging and developing economies are following export-led growth. The aim of this study is to find out empirical relationship between the exchange rate and the exports for India. The data at macro level for exports of India and nominal as well as real exchange rate will be analysed to find out if weak rupee positively impacts exports. Contrary to the established belief, this paper finds that there is a negative correlation between exchange rate and exports. We also take into consideration import growth and find that import growth explains major variation in export growth. The results of the analysis are compared with the traditional / theoretical models that predict the relationship between the exchange rate and trade balance, including the Marshall-Lerner condition. Further, an attempt is made to reason any discrepancies between the empirical results and theoretical predictions.