2. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)
2008. The degree of this impact varies as per the domestic and international economic variables. The
economical forces are contracting and expanding in the blink of eyes. The major economic features
in this context are domestic savings, industrial development, inflation, foreign exchange reserves,
and regulatory norms of the government related to tax restrictions and tariff barriers. But due to the
limitation only four variables are chosen for the analyses which are mentioned below:1.
2.
3.
4.
Exchange Rate
Imports
Exports
Trade Balance
REVIEW OF LITERATURE
In the history, the study of relationship between trade balance and exchange rate has sought
increased attention with the passage of time. Normally J-curve or Granger Causality test have been
used for the analysis and relationship has been found between them with varied degree as per the
study. Shin and Smith, 1996 reported a significant long-run relationship between the trade balance
and the exchange rate. They explored that real depreciation of the US dollar had a favorable effect
on the trade balance of US. Baharumshah, 2001 employed an unrestricted VAR model for the
bilateral trade balances of Thailand and Malaysia with the United States and Japan for the period
1980 to 1996. He found support for a stable and positive long-run relationship between trade balance
and the exchange rate. Ng Yuen-Ling and Har Wai-Mun, 2008 analyzed relationship between the
real exchange rate and trade balance in Malaysia from year 1955 to 2006. The main findings of their
paper were that long run relationship exists between trade balance and exchange rate and real
exchange rate is an important variable to the trade balance, and devaluation will improve trade
balance in the long run. Anubha Dhasmana, 2012 studied the relationship between India’s real
exchange rate and its trade balance using quarterly trade data for 15 countries and explored that real
exchange rate depreciation is positively associated with the trade balance in the long run. At the
same time real exchange rate volatility is negatively correlated with India’s trade balance in the long
run. Keshab R. Bhattarai and Mark Armahy, 2013 examined the effects of exchange rates on the
trade balance of Ghana. They estimated the trade balance as a function of the real exchange rate,
domestic and foreign incomes and found a stable long run relationship between both exports and
imports and the real exchange rate with the help of co-integration analyses. They suggested that for
improved balance of trade in Ghana, coordination between the exchange rate and demand
management policies should be strengthened and be based on the long run fundamentals of the
economy.
CONSTRUCT OF THE STUDY
Objective or research gap: The major objective of the study is to find out the impact
exchange rate on trade balance. The sub objectives of the study are
• To find out the liaison between imports and exchange rate and the degree of dependence
imports on exchange rate as well.
• To find out the liaison between exports and exchange rate and the degree of dependence
exports on exchange rate as well.
• To find out the liaison between trade balance and exchange rate and the degree
dependence of trade balance on exchange rate as well.
Sample, data and methodology
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of
of
of
3. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)
The present study adopts analytical and descriptive research design. Monthly time series data
of export, import and trade balance is considered for the study. For exchange rate weighted average
monthly data is taken in the form of time series. There were 61 observations in the time period i.e.
August 2008 to August 2013. Secondary data has been collected from annual publications of
Planning Commission of India, RBI and NSE.
TOOLS FOR ANALYSIS
•
•
•
Ratio Analysis: The financial ratios which have been used for comparative analysis of Indian
banks are: Net NPAs (Net Non Performing Assets) and CAR (Capital Adequacy ratio) and
ROA (Return on assets) where Net NPAs and CAR are risk indicators and ROA reflects the
profitability of the banks.
Correlation: Regression analysis has been used to know the quantum and cause of
relationship.
Analysis of Variance (ANOVA): The statistical tool Analysis of Variance (ANOVA) was
applied in order to find out the existence of relationship between the chosen variables.
ANALYSIS AND INTERPRETATIONS
Imports and Exchange Rate
Ho: No significant relationship exists between exchange rate and imports in India.
Ha: Significant relationship exists between exchange rate and imports in India.
Table 1: Regression Statistics
Observations
61
R Square
0.173926185
Adjusted R Square
0.159924934
Std. Error of the
Estimate
9925.716751
Outlook: Table 1 is expressing the degree of relationship. Value of R square is 17.39% which tells
that one percent change in one variable will be explained by 17.39% change in another variable.
Table 2: Residual Statistics
Coefficients Std. Error
t-stat
Sig.
Constant
-19489.8
14357.328
-1.357
0.18
EXR
1018.187
288.887
3.525
0.001
Outlook: Table 2 is giving us statistical coefficients for deriving our model and we can extract the
following linear regression equation.
IMP = -19489.8 + 1018.187 ER+ 14357.328* E where,
IMP: Imports
ER: Exchange Rate
E: Error Term
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4. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)
Table 3: ANOVA
df
Mean Square
SS
Regression 1223832219
1
1223832219
F
Sig.
98519853.03
Residual
5812671329
59
Total
7036503548
12.42219 0.000827
60
Outlook: Table 3 is explaining the presence of liaison between forecaster and dependent variables.
The value of p (0.00827) is significantly less than 0.05 with 95% confidence level. So we reject the
null hypothesis and accept the alternative hypothesis thus inference that there exist relationship
between imports and exchange rate.
Exports and Exchange Rate
Ho: No significant relationship exists between exchange rate and exports in India.
Ha: Significant relationship exists between exchange rate and exports in India.
Table 4: Regression Statistics
Observations
61
R Square
0.098641739
Adjusted R Square
0.08336448
Std. Error of the
Estimate
13031.91947
Outlook: Table 4 is expressing the degree of relationship. Value of R square is 9.86% which tells that
one percent change in one variable will be explained by 9.86% change in another variable.
Table 5: Residual Statistics
Coefficients
Std. Error
t-stat
Sig.
Constant
32064.96479 18850.38072 1.701024784 0.09420373
EXR
963.7909647 379.2933309 2.541017429 0.01370275
Outlook: Table 5 is giving us statistical coefficients for deriving our model and we can extract the
following linear regression equation.
EXP = -32064.9647 + 963.7909ER+ 18850.38072* E where,
EXP: Exports
ER: Exchange Rate
E: Error Term
SS
Table 6: ANOVA
df
Mean Square
Regression
1096559149
1
1096559149
Residual
10020024573
59
169830925
Total
11116583722
60
162
F
Sig.
6.45677 0.013703
5. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)
Outlook: Table 6 is explaining the presence of liaison between forecaster and dependent variables.
The value of p (0.013703) is significantly less than 0.05 with 95% confidence level. So we reject the
null hypothesis and accept the alternative hypothesis thus inference that there exist relationship
between exports and exchange rate.
Trade Balance and Exchange Rate
Ho: No significant relationship exists between exchange rate and trade balance in India.
Ha: Significant relationship exists between exchange rate and trade balance in India.
Table 7: Regression Statistics
Observations
61
R Square
0.123973455
Adjusted R Square
0.109125547
Std. Error of the
Estimate
4162.390497
Outlook: Table 7 is expressing the degree of relationship. Value of R square is 12.39% which tells
that one percent change in one variable will be explained by 12.39% change in another variable.
Table 8: Residual Statistics
Coefficients
Std. Error
t-stat
Constant
EXR
5149.794245
Sig.
6020.804976 0.855333176 0.39582691
-350.0590945 121.1461566 2.889560052 0.00538911
Outlook: Table 8 is giving us statistical coefficients for deriving our model and we can extract the
following linear regression equation.
TRB = 5149.794245 -350.0590945ER+ 6020.804976* E where,
TRB: Trade Balance
ER: Exchange Rate
E: Error Term
SS
Regression 144660210.2
Table 9: ANOVA
df
Mean Square
1
144660210.2
F
Sig.
17325494.65
Residual
1022204184
59
Total
1166864395
8.349557 0.005389
60
Outlook: Table 9 is explaining the presence of liaison between forecaster and dependent variables.
The value of p (0.005389) is significantly less than 0.05 with 95% confidence level. So we reject the
null hypothesis and accept the alternative hypothesis thus inference that there exist relationship
between trade balance and exchange rate.
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6. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)
CONCLUSIONS
In the current year exchange rate of Indian Rupee has faced mammoth depreciation. In fact it
crossed the number 60 in no time. This sudden decline was unbearable for the economical factors.
Trade balance (which is considered to be imperative for economy) is also affected by the variations
of exchange rate. As the trade balance is composition of exports and imports, individual liaison of
imports and exports with exchange rate is equally important. We detect from this study the imports
are chiefly impacted by exchange rate instead of exports which has lesser impact of exchange rate
fluctuations. This is true on the fundamental views of economists and analysts also. This can be due
the big impact on the pockets of importers as it is related to the affordability. So imports are more
sensitive in comparison of exports. On the other hand trade balance impact is balanced by two
variables some and how. Overall liaison between trade balance and exchange rate comes out to be
strong.
In extension to this study additional studies can be done on the following parameters:• Period of the study could be enlarged
• Partial or multiple regression can be applied by taking some more variables which also have
significant liaison with trade balance
REFERENCES
1. Shin and Smith, 1996, “India’s Real Exchange Rate and Trade Balance: Fresh Empirical
Evidence”, Indian Institute of Banglore, working paper no. 373
2. Rodriguez, Carlos A., 1980, "The Role of Trade Flows in Exchange Rate Determination: A
Rational Expectations Approach." Discussion Paper no. 77-7813, Columbia Univ, Januar.
3. Baharumshah, 2001 “The Effect of Exchange Rate on Bilateral Trade Balance: New
Evidence from Malaysia and Thailand”, Asian Economic Journal 15(3):291 - 312.
DOI:10.1111/1467-8381.00135
4. Ng Yuen-Ling and Har Wai-Mun, 2008, “Real Exchange Rate and Trade Balance
Relationship: An Empirical Study on Malaysia”, International Journal of Business and
Management, Vol. 3, No. 8.
5. Anubha Dhasmana, 2012, “India’s Real Exchange Rate and Trade Balance: Fresh Empirical
Evidence”, Indian Institute of Management Bangalore, Working Paper Number -373.
6. Keshab R. Bhattarai and Mark Armahy, 2013, “The effects of exchange rate on the trade
balance in Ghana: Evidence from co-integration analysis”, African Journal of Business
Management, Vol. 7(14), pp. 1126-1143.
7. Deepa H Kandpal and Khimya S Tinani, “Inflationary Inventory Model under Trade Credit
Subject to Supply Uncertainty”, International Journal of Management (IJM), Volume 4,
Issue 4, 2013, pp. 111 - 118, ISSN Print: 0976-6502, ISSN Online: 0976-6510.
8. Dr.C.Chitra, “India Trade after Liberalization- Auto and Auto Components- An Overview”,
International Journal of Management (IJM), Volume 3, Issue 1, 2012, pp. 145 - 148,
ISSN Print: 0976-6502, ISSN Online: 0976-6510.
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