Effect of REER on exports: An anecdote from India

One of the crucial affairs in case of exchange rate, specifically in underdeveloped and developing economies is the impact of REER (Real Effective Exchange Rate) on macro-economic variables. This paper examined the effect of REER on exports of India. The objectives of this paper are to examine the effect of REER on exports of India for a period of nine and a half year i.e., from April 1, 2004 to September 30, 2013 and to study the real implications of fluctuations of REER for Indian exports. A large number of techniques have been employed, namely, ADF (Augmented Dickey Fuller) test, Co-integration, VECM (Vector Error Correction Model), Variance Decomposition Analysis, Impulse Response, and Granger Causality test. The results confirm the dominant role of REER to Exports and exports makes greater adjustment to restore long run equilibrium. We find that the increase in the REER leads to a decrease in the value of India's merchandise exports as measured in dollar. In view of the Indian economy's dependence on exports and the Reserve Bank of India's managed exchange rate policy, our empirical results indicate a currency appreciation and volatility, in general, have an adverse effect on India's exports.