Exchange Rate Volatility and Its Impact on India’s Export–Import Trade: An Empirical Assessment of RBI’s Interventions

Abstract

The extent to which central bank interventions reduce currency fluctuations and promote trade stability has been a topic of much discussion in the economic literature on the relationship between exchange rate volatility and economic activity. The Reserve Bank of India (RBI) must periodically intervene in India’s controlled floating currency rate regime in order to reduce excessive volatility. The influence of exchange rate variations on India’s export–import trade is empirically evaluated in this article, along with the efficiency of RBI interventions in maintaining macroeconomic stability. This study uses monthly data from 2007 to 2024 and applies a time-series econometric technique to analyse exchange rate changes and important trade variables. The study uses a vector autoregression model to describe the dynamic interactions between imports, exports and exchange rate volatility, and it uses the augmented Dickey–Fuller test to guarantee data stationarity. The results indicate that exchange rate variations have a minimal direct impact on export and import performance, but historical trade patterns have a large influence on current trade flows. The findings also show that whereas RBI interventions aid in stabilisation in the short term, they fall short in addressing more fundamental structural trade issues, including asymmetric trade elasticity and import dependency. These observations add to the policy discussion about managing exchange rates in developing nations. The study comes to the conclusion that while exchange rate interventions are required for short-term stability, a complex strategy that includes export diversification, easier access to hedging mechanisms and greater domestic manufacturing capacities is needed for long-term trade resilience. These findings have ramifications that go beyond India; they provide guidance to other emerging nations on how to handle exchange rate volatility in the face of global economic uncertainty.

JEL Codes: F31, F41, E58, C32, F13