Bilateral Export Demand Function of India: An Empirical Analysis

In this paper, we examine the determinants of bilateral export demand function of India during 1993:Q1-2015:Q1. The starting point of our study is 1993:Q1 by keeping into consideration that RBI implemented market determined managed floating flexible exchange rate system during that period. We have employed Auto Regressive Distributed Lag (ARDL) model by using the macroeconomic variables such as real exports, foreign income, nominal exchange rate (Rupee-Dollar) and relative price. We found there exists a long run equilibrium relationship between real exports, foreign income, exchange rate and relative price. In our empirical analysis, we found that in the long run and short run, real exports are influenced more by foreign income followed by relative price. Foreign income carries a positive sign and is statistically significant, which implies that 1% increase in foreign income will increase real export by 1.63% in the long run. Likewise, relative price carries a negative sign and is statistically significant which implies 1% decrease in relative prices that will increase real exports by 0.22% in the long run. The nominal exchange rate carries a negative sign and is statistically significant (in both short run and long run), which suggests that depreciation of nominal exchange rate would not stimulate the volume of export during our study period. Hence, for policy point of view if any policy makers want to promote exports by depreciating, the rupee will not give fruitful results.