Exchange rate volatility has a significant negative impact on India's exports and imports according to this study. Regression analysis was used to analyze the relationship between exchange rates and trade flows in India from 2001-2014. It found that higher exchange rate fluctuations reduced both exports and imports, while lower fluctuations increased trade. The key findings were that a 1 unit increase in the exchange rate correlated with a 0.000389884 unit decrease in imports and a 0.00064351 unit decrease in exports. Therefore, the study concluded that exchange rate volatility negatively impacts India's international trade flows.

1. Exchange Rate Volatility and its impact on Trade
flow in India
Abstract
This study is about the impact of exchange rate volatility and trade flow in India
(EXPORT& IMPORT).Wehas used regression techniqueto find out the result. The
analyses havebeen taken out for the period 2001 to2014.Thestudy revealed that
the export and the import are affected by the change in exchange rate volatility of
the Indian economic. We Found out that the exchange rate volatility have a
significant negative impact on exports and imports of the country, means that
higher exchange rate fluctuation in the economy less will be the exports , and lesser
the fluctuations in the exchange rate the greater the exports.
Keywords: Exports , Imports , Regression , Exchange rate
INTRODUCTION:
Investopediadefinesexchange rate as "the price of a nation’scurrency with
respect to the price another currency”. Asper this definition it’s clear that, an
exchange rate is compose and compriseof two main elements, that's; "Domestic
Currency"and "Foreign Currency"respectively. Itcan be expressed in direct and
indirect form. It’s in direct form "when the price of a unitof a foreign currency is
determined in terms of the domestic currency"and on the contrary "when the
price of a unitof a domestic currency isdetermined in terms of foreign
currency"it’s in indirect form, (Investopedia).If exchange rates do not have
domestic currency asone the two currency constituentsit’s recognized as cross
currency or cross rate.
Exchange rate fluctuations play a pivotal rolefor developingnationsthat,
principally, depend on trade. Let’s take an exampleof India. It has been seen that

2. the exchange rate fluctuationsmakes internationaltrade flow difficult because
of the conceptthat exchange rate fluctuationspersonify ambiguity and would
levy expensesin risk-averse commodity merchants. Exchange rate volatility is
frequently considered asa threat and any fluctuationswould escalate cost for
risk-averse tradersand slow down trade, (Ethier, 1973).Exchangerate
fluctuationshave a correlation with tradeflow because of the fact that if
exchange rate becomes volatile this would certainly create ambiguity about the
returnsto be madeand therefore, decrease the better chances of international
trade. But, however, Cote in 1994 emphasized that theory of risk aversion does
not, essentially, mean that exchange rate volatility lessens the magnitudeof
trade. His work is based on the argumentthat an escalation in exchange rate
volatility has two effects or cases:
1. Substitution effect and,
2. Incomeeffect
Both these “effects”worksdiffersand worksin oppositecourse. The Substitution
effect indicates that exchange rate fluctuationsnegatively impacts merchant’s
trade movement. On the contrary, incomeeffect implies that extra resources
might be dedicated to the activity in order to reimbursefor that fall. Therefore,
in order to dodgethe decline in their (traders)earningstraders with morerisk-
aversion traits indulgein further exportactivities as risk escalates.
Apartfrom that many researchers like: Brolland Eckwertin 1999 and Frankein
1991 putforward an “option view” wherein the exchange rate volatility would
escalate the worth of exportoptions. Hence, it willresult to encourage an
organizations“productivity” and the “foreign trade,”.
#Exchange rate fluctuations: Indian economy and trade flow
Exchange rates across the world haveswungafter the break-down of the
“Bretton Woods” structureof permanentexchange rates. Ever since, there has
been broad discussion about influenceof exchange rate volatility on worldwide
exports. Over the last decade Indian economy has witnessed animpetusby
accomplishing and sustainingannualGDP growthrate of morethan 7 per cent.
And this growth rate has accredited to the flourishing exportsector to the Indian

3. economy. Indian EconomicReform of 1991 is attributed to the growing and
booming sector of Indian exports. Duringthe yearsof 1991 and 2009, India’s
portion in world exportshas climbed to sub-stantial volume: 0.56 to 1.52 per
cent, (P. Srinivasan and M. Kalaivani.)India has gradually become an open
economy because of the policies that have shaped and promoted India’sexports.
ButIndian economy is, by and large, lagging behind in manufacturingsector.
Therefore, in order to strengthening and boosting manufacturingsector the
governmentof Indiahas introduced a“New ManufacturingPolicy” in 2011.The
leading concern and bottleneck of “Indian Exports” are the consistent exchange
rate fluctuations. It’s essential to have a robust domesticcurrency against main
internationalcurrency like: US dollar. From the time when the Chinese currency
wentin deprecation state to a fiveyear low on January 6, 2016standardizingit
at 6.2 unitsof Renminbi(the official nameof the currency which was introduced
by the communistPeople’sRepublicof China)to US dollar; the exchange rates of
local currenciesacross Asia began to fall against US dollar, hence; affecting sharp
instability in many currency marketsincludingIndiadueto its consistent
foreign trade.
The declineof Indian rupeeagainst US dollar addswoesto Indian exporters
when Indian Rupeeonce touched the 68.85 mark againstUS dollar thereby
discouragingthe exports. The beginningof the current story of currency
volatility in developingeconomiesoriginate from US Central Bank Federal
Reserveraising its standard interest rate by 25 basis points on December 16,
2015 for the first time since 2006. Suchguidelineshave an adverseimpact and
rapid shift of the internationalinvestor attitudes from developingmarketsto
developed marketstriggering certain migration of foreign investments. Certain
nations like: India, China, Malaysia, Brazil, Indonesia, Koreaetc. are badly
affected because they’re dependenton foreign investments.
.

4. REVIEWOF LITERATURE
2.1 INTRODUCTION
Some of the research works which are related to the exchange rate
volatility and the trade flow in India. Most of the studies done on these topics
are done in the few recent years. In this we have taken some of the research
papers which were similar to this study and can be very closely connected
with the topic/study.
DR.G.JAYACHANDRAN(2013) in this paper the impact of exchange rate
volatility on the real exports and Imports in India. Using annual time series
data, the empiricalanalyses was carried out for the period 1970 to 2011. The
study results confirmed that real exports and imports are cointegrated with
exchange rate volatility, real exchange rate, gross domestic product. The
results were implied that the exchange rate has significant negative impact
on real exports imports, implying that higher exchange rate fluctuation tends
to reduce real exports in India. The empirical results reveal that GDP has a
positive and significant impact on India s real exports in the long-run, but the
impact turns out to be insignificant in the short-run.
Dr.Nazneen Ahmad and etal (2012) this study was to examine how the trade
balance between the United States and Mexico was influenced by the
Peso/Dollar exchange rate as well as US and Mexican. This study also briefly
examined the Marshall-Lerner condition and J-curve phenomena. Quarterly
GDP and real exchange rate data are analyzed using a statistical regression
where the independent variables are domestic GDP, foreign GDP, and real
exchange rates.
M. Kalaivani & P. Srinivasan1 (2012)Thispaper empirically investigated the
impact of exchange rate volatility on the exports in India Using annualtime
series data, the empirical analyseswas carried out for the period 1970 to 2011.
The study resultsconfirm that real exports are co integrated with exchange rate
volatility, real exchange rate, gross domestic product. Our findingsindicatethat
the exchange rate volatility has significant negative impact on real exports both

5. in the short-run and long-run, implyingthat higher exchange rate fluctuation
tendsto reducereal exportsin India. Besides, the real exchange rate has
negative short-run and positive long-run effectson real exports. The empirical
results revealthat GDP has a positiveand significant impacton Indias real
exports in the long-run, butthe impact turnsout to be insignificantin the short-
run. In addition, the foreign economic activity exerts significant negative and
positive impact on real exports in the short-run and long run, respectively.
KalyaniAmithVikram The main purposeof the study wasto investigate the
impact of macroeconomicvariables of Indiawhich includesInflation, Interest
rate, GDP and Foreign Direct Investment(Inflows)and its impact on exchange
rate against USD by usingannualdataover the period of 1996 to 2014. These
variables have been taken as Independentvariableand exchange rate volatility
is taken as dependentvariable. This study wasconducted to investigate whether
uncertainty or fluctuationsin exchange rate affect the macroeconomicvariables
in India. Linear Regression technique was used to investigate the relationship
between dependentand independentvariables. From the result of regression
analysis, the inflation and GDP ratehave negative and insignificantassociation
with exchange rate whereas Interest rate has negative and significant
association WhereasForeign Direct Investmentshows positiveand insignificant
relationship with exchange rate.

6. Methodology :
The data collected is on the total importsof India, Total Importsof Indiaand
Fluctuationsin exchange rate.
The data which is used for the study is all Secondary data which is used for the
information. The data collected is from the ReserveBank of India. The data
collected is for the period of 14 years(2001 – 2014 ).
For uniformity in the analysis of data , all the data presentweregiven and the
data are taken in Indian Rupees. In order to find outthe impact of exchange
rate fluctuations, on the importand exportthe regression method is used.
IMPORTS, EXPORTSand EXCHANGE RATE.:
The exchange rate taken in the study is from 2001 – 2014. Wehavetaken the
valueof exchange rate in the starting of the month Aprilof every year. In this we
madean attempt to find out the relation between the imports and the exchange
rate volatility and the exports and the exchange rate volatility usingthe
regression equation.

7. This table representsthe data of the importsand the exchange rate.
Table 1
0
5000
10000
15000
20000
25000
30000
Imports
Exchange rate
Year Imports Exchange rate
2013-14 27141.81505 59.6463
2012-13 26691.61957 54.3345
2011-12 23454.63 50.5645
2010-11 16834.66956 44.45
2009-10 13637.356 44.73
2008-09 13744.356 50.3
2007-08 10123.117 39.98
2006-07 8405.063 43.13
2005-06 6604.089 44.61
2004-05 5010.645 43.76
2003-04 3591.077 43.77
2002-03 2972.059 47.41
2001-02 2451.997 48.8
2000-01 2308.728 46.64

8. From this table we can see that the valueof Importshave increased morethan
10 times. The valuerose from 2308.728 in 2001to 27141081505in 2014and
the valueof the exchange rate also rose from 46.64 in 2001to 59.6463in 2014.
Regression

9. Y= 42.75610643+ 0.000389884x
For x= 46.64 Y= 42.77414
For x= 48.8 Y= 42.77502
For x= 47.41 Y=42.7744
For x= 43.77 Y=42.77306
For x= 43.76 Y=42.77306
For x= 44.61 Y=42.77339
For x= 43.13 Y=42.77281
For x= 39.98 Y=42.7715
For x= 50.30 Y=42.7756
For x= 44.73 Y=42.77343
For x= 44.45 Y=42.77333
For x= 50.56 Y=42.7757
For x= 54.33 Y=42.7718
For x= 59.64 Y=42.77925
0
10
20
30
40
50
60
70
x ( EXCHANGE RATE)
Y ( IMPORTS )

10. Explanation
Multiple R 0.678166634 R = square root of R2
R Square 0.459909984 R2 = coefficient of determination
Adjusted R Square 0.414902482 Adjusted R2 used if more than one x variable
Standard Error 3.924465102
This is the sample estimate of the standard deviation of the
error u
Observations 14 Number of observations used in the regression (n)
The RegressionStatisticsTable givesthe overall goodness-of-fitmeasures:
R2
= 0.459909984
Correlationbetweenyandx is 0.678166634
INTERPRETANOVA TABLE
Table 2Df SS MS F Signifiance F
Regression 1
157.3797595 157.3797595 15.40142634 0.007680257
Residual 12
184.8171161
15.40142634
Total 13
342.1968756

11. This table represents the dataof the exports andthe exchange rate.
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Exports
Exchange rate
Year Exports Exchange rate
2013-14 18941.81952
59.6463
2012-13 16343.18838 54.3345
2011-12 14659.5939
50.5645
2010-11 11429.2192
44.45
2009-10 8455.336 44.73
2008-09 8407.551
50.3
2007-08 6558.635 39.98
2006-07 5717.793
43.13
2005-06 4564.179
44.61
2004-05 3753.395 43.76
2003-04 2933.668
43.77
2002-03 2551.373 47.41
2001-02 2090.18
48.8
2000-01 2035.71
46.64

12. This table shows thatthe value of exports havebeen increased from2035.71
in 2001 to 18941081952 in 2014 and the monetary value of Rs changed from46.64
in 2001 to 59.6463in 2014.
Regression :
Y = 42.3101 + 0.00064351 x
X= 59.6463 y= 42.3484
x= 54.3345 y= 42.3450
x= 50.5645 y= 42.3426
x= 44.45 y= 42.3387
x= 44.73 y= 42.3388
x= 50.3 y= 42.3424
x= 39.98 y= 42.3358
x= 43.13 y= 42.3378
x= 44.61 y= 42.3388
x= 43.76 y= 42.3382
x= 43.77 y= 42.3382
x= 47.41 y= 42.3406
x= 48.8 y= 42.3415
x= 46.64 y= 42.3401

13. 0
10
20
30
40
50
60
70
Relation between exchangerateand exports
x ( EXCHANGE RATE ) y ( EXPORTS )
Explanation
Multiple R 0.702568422
R = square root of R2
R Square
0.493602388
R2 = coefficient of determination
Adjusted R Square
0.451402586
Adjusted R2 used if more than one x variable
Standard Error
3.800084219 This is the sample estimate of the standard deviation of
the error u
Observations 14 Number of observations used in the regression (n)

14. The RegressionStatisticsTable givesthe overall goodness-of-fitmeasures:
R2
= 0.493602388
Correlationbetweenyandx is 0.702568422
INTERPRET ANOVA TABLE
df SS MS F Signifiance F
Regression 1
168.9091948
168.9091948 11.69679419 0.00507803
Residual 12
173.2876808
14.44064007
Total 13
342.1968756

15. CONCLUSION:
This study has provided us with the Economic relationship between
Exchange Rate volatility, and the trade flow in India. These results provide
confirmation that there is the impact of the change in the exchange rate on
the trade flow of India.
The inter-relationship between a nation’s imports and exports, and its
exchange rate, is a complicated. The exchange rate has an effect on the
trade surplus (or deficit), which affects the exchange rate. A weaker
domestic currency stimulates exports and makes imports more expensive.
Similarly, a strong domestic currency hampers exports and makes imports
cheaper.
Exchange rate fluctuations play a pivotal role for developing nations that,
principally, depend on trade. In the study it has been seen that the
exchange rate fluctuations makes international trade flow difficult because
of the concept that exchange rate fluctuations personify ambiguity and
would levy expenses in risk-averse. Exchange rate volatility is frequently
considered as a threat and any fluctuations would escalate cost for risk-
averse traders and slow down trade