Exchange Rate Dynamics and the Global Competitiveness of Indian Exports: Evidence from ARDL Bounds Testing and GARCH Volatility Modelling

Abstract

This study empirically examines the relationship between exchange rate dynamics and the global export competitiveness of India over the period 2000–2023, using annual secondary macroeconomic data sourced from the Reserve Bank of India (RBI), World Bank World Development Indicators, International Monetary Fund World Economic Outlook, World Trade Organization, and United Nations Comtrade Database. The study employs an Autoregressive Distributed Lag (ARDL) bounds testing framework, a GARCH (1,1)-based exchange rate volatility measure, and sector-wise Ordinary Least Squares (OLS) regression models to examine aggregate and sectoral export competitiveness in response to Real Effective Exchange Rate (REER) movements, nominal exchange rate fluctuations, and currency volatility. Key findings reveal that REER depreciation carries a long-run elasticity of 0.066 on export volumes, while the error correction mechanism indicates that 61.1 per cent of short-run disequilibrium is corrected annually, confirming a stable long-run equilibrium. Exchange rate volatility, estimated via a GARCH (1,1) specification with a persistence parameter of 0.95, significantly reduces textiles and engineering goods export competitiveness, while exerting heterogeneous effects across sectors. GDP growth and trade openness emerge as dominant structural determinants of export performance. The F-bounds statistic of 2.814, situating cointegration in the inconclusive zone, is confirmed via the negative and statistically significant error correction coefficient, consistent with Kremers, Ericsson, and Dolado (1992). Findings suggest that exchange rate stability, alongside supply-side structural reforms, is critical for sustaining India\'s global export position.

Introduction

The text examines how exchange rate dynamics influence the global competitiveness of Indian exports from 2000–2023. It explains that while currency depreciation is generally expected to boost exports, its actual impact depends on multiple factors such as production structure, global demand, volatility, and sectoral differences. India’s evolving export basket—ranging from commodities to manufactured and service-based goods—has made export performance increasingly sensitive to exchange rate movements and macroeconomic conditions.

The study uses econometric methods including ARDL bounds testing, GARCH volatility modeling, and sector-wise OLS regression to analyze both long-term relationships and short-term effects. It investigates whether exchange rate fluctuations and volatility significantly affect export performance, whether a long-run relationship exists between the Real Effective Exchange Rate (REER) and export market share, and whether exchange rate stability improves competitiveness.

The literature review shows mixed findings: classical trade theory supports depreciation-driven export gains, while modern research highlights the importance of structural factors, technology, and volatility. It also notes that exchange rate uncertainty can reduce competitiveness and that sectoral responses vary significantly.

Using Indian data from 2000–2023, the methodology includes REER, export data, GDP, inflation, trade openness, and global growth indicators. Exchange rate volatility is modeled using GARCH, and long-run relationships are tested using ARDL. Sector-specific impacts are also analyzed across key industries like textiles, pharmaceuticals, petroleum, and engineering goods.

Conclusion

This study provides a comprehensive empirical examination of the relationship between exchange rate dynamics and India\'s global export competitiveness over 2000–2023. Employing ARDL bounds testing, GARCH (1,1) volatility modelling, and sector-specific OLS regressions on data from the RBI, World Bank, IMF, WTO, and DGCI&S, the study establishes several robust findings. REER depreciation improves India\'s export performance in the long run, with a statistically significant elasticity of 0.066, while the error correction mechanism confirms stable long-run cointegration with a 61.1 per cent annual adjustment speed. Exchange rate effects are, however, structurally muted compared to GDP growth (elasticity ? 0.90) and trade openness, confirming that supply-side capacity and policy liberalization are the dominant drivers of India\'s rising global export share. Exchange rate volatility — characterized by high persistence (? + ? = 0.95) and identifiable crisis-driven spikes — significantly impairs competitiveness in textiles and engineering goods while leaving pharmaceuticals and petroleum products relatively unaffected. Together, these findings call for a balanced policy approach combining exchange rate stability with structural reforms, sector-specific hedging support, and sustained trade facilitation to strengthen India\'s position in global markets. The study contributes to the international trade and open economy macroeconomics literature by providing a unified framework integrating exchange rate level effects, volatility, and multi-sector competitiveness in the Indian context — a contribution that is directly relevant to contemporary policy debates on India\'s export-led growth strategy.

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