Exchange rate and service exports from India: A nonlinear ARDL analysis

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Using linear and nonlinear autoregressive and distributed lag (ARDL) models we examine the relationship between real exchange rate and service exports from India by incorporating goods exports, financial development, FDI inflows, world demand and economic globalization during 1975-2015. Linear ARDL results indicate that 1 percent currency appreciation results in a reduction of the service exports by 0.01 percent in the long run. The net effect in the short run is negative and not significant. On the other hand, nonlinear ARDL results show the absence of any significant asymmetric impact of real exchange rate variations on service exports from India both in the short and long run. This implies that the J-curve effect between real exchange rate and service exports does not exist in the Indian context. Our results also show that the impact of supply augmenting factors (such as FDI inflows, financial development, and globalization) and demand-side factors (such as world demand) is more dominant than price effects on service exports.