ASYMMETRIC EFFECTS OF EXCHANGE RATE CHANGES ON INDIA'S TRADE BALANCE: AN EMPIRICAL INVESTIGATION

Abstract

This study examines the asymmetric effects of exchange rate changes on India's trade balance and its repercussions on the external sector policy, with a focus on the foreign exchange reserves and real Gross Domestic Product (GDP). The paper provides key definitions of various exchange rates within the context of India's economic landscape. A comprehensive literature review delves into the ongoing debate surrounding the adoption of a strong or weak exchange rate policy and its implications on the overall economy. Subsequently, the paper introduces a model illustrating the cyclical nature of currency fluctuations in an economic framework. Empirical findings reveal that currency depreciation correlates with an increase in foreign exchange reserves and economic growth. Utilizing data from the International Financial Statistics of the International Monetary Fund and World Development Indicators of the World Bank, econometric tests and software are employed to validate the hypothesis. The results are thoroughly examined, leading to concluding remarks. The study acknowledges certain limitations in its research approach