Real effective exchange rate depreciation for INR improves trade balance for India

A research article published in RBIs monthly bulletin examines the factors that impact real effective exchange rate (REER) in a cross-country setting. Also, it analyses the impact of REER movements on Indias merchandise trade balance using a non-linear autoregressive distributed lag (NARDL) model. It noted that Cross-country estimates of select emerging economies indicate that the REER is influenced by productivity differential, terms of trade, government expenditure and net foreign assets. The empirical analysis for India indicates the existence of asymmetric association between trade balance and REER. The empirical findings indicate that in India depreciation in REER improves trade balance while appreciation deteriorates it. The impact of REER depreciation on trade balance is more than an equivalent REER appreciation in the short-run and vice versa in the long-run.

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