Exchange rate volatility and India-US commodity trade: evidence of the third country effect.

Abstract

The relationship between trade flows and exchange rate uncertainty is still being debated in academic circles while examining the effects of exchange rate uncertainty on India's bilateral trade flows, prior research disregard the "third-county" effect. This study investigates the effect of third-country risk on the amount of India-US commodity trade using time series data for 79 Indian commodity export and 81 Indian commodity import businesses. The results show that the volume of trade in a select few industries is considerably impacted by third-country risk in terms of dollar/yen and rupee/yen. According to the findings, rupee-dollar volatility affects 15 exporting industries in the short run and 9 industries in the long run. Similarly, the third country effect demonstrates that Rupee-Yen volatility affects 9 Indian exporting industries both in the short and long run. The results show that rupee-dollar volatility tends to have a short-term impact on 25 importing industries and a long-term impact on 15 sectors. Similar to this, the third country effect demonstrates that Rupee-Yen volatility tends to have an impact on 9 Indian importing industries over the short and long term.