Bilateral J-curve between India and her trading partners

What is it about?

The main purpose of this study is to investigate the short-run and the long-run effects of real depreciation of the rupee on Indian trade balance using bilateral trade and real exchange rate data. The seven trading partners that are selected are the largest partners of India and all together do count for more than 50% of Indian trade.

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Why is it important?

Previous studies that investigated the short-run and the long-run effects of real depreciation of the Indian rupee on her trade balance employed aggregate data and provided insignificant results. A few studies that have considered the bilateral trade balance of industrial countries, have argued that lack of significant results could be due to aggregation. This paper employed disaggregated bilateral data from India against her seven largest trading partners to investigate the short-run and the long-run response of the trade balance to a currency depreciation. The methodology was based on a new cointegration technique advanced by Pesaran and Shin (1995) and Pesaran et al. (1996), known as the ARDL approach. The main conclusion of the paper is that even though the J-curve pattern did not receive any support, in the long-run real depreciation of the rupee against the currencies of Australia, Germany, Italy and Japan has positive impact on India’s trade balance with each country.

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