TRINITY
EFFECTS ON CURRENT AND CAPITAL ACCOUNT OF FOREIGN TRADE IN INDIA
By
Dr. G. Naresh,
Assistant Professor,
Department of Commerce,
School of Management,
Pondicherry University,
Karaikal Campus,
Aurojyoti Kar,
Abstract
Exports
and imports of goods and services have grown rapidly since the World War II. Foreign
trade is more important for all the countries to increase the foreign exchange
holdings of all the economies in the current days. An increasing volume of trade
for a country benefits the standard of living of our population as well as
economic development in several ways. In spite of the steady growth in international
trade, there are some frequent concerns about the impact of exchange rate,
inflation rate and MIBOR movements on foreign trade on export and import
activities of a country. This paper empirically investigates the impact of
exchange rate, inflation and MIBOR volatility on the exports and Imports in
terms of current account, capital account and overall account position in
India.
Keywords: Foreign
Trade, Export, Import, Exchange Rate, Inflation Rate, MIBOR
Introduction
Import and Export have
been growing importance of vibrant and emerging economies in the global trade
and the share of total output in the globe. In the early 1970s, the collapse of
the Bretton Woods System triggered on whether the exchange rate variability is
a curb of global trade. Recently, 1997 Asian financial crisis and 2008 global
financial crisis were rekindled on exchange rate, inflation and MIBOR effects
on trade; thereby the overall trade activity is an aggregation of decisions of
individual firms of any nation. India has launched its policy reform agenda and
implemented a host of liberalization reforms, primarily targeting the foreign
exchange market and the tradable sectors. India shifted to a more market
oriented exchange rate system through devaluations and deregulations in 199293.
Since then the exchange rate has mostly been under a managed floating regime
with the Reserve Bank of India intervening from time to time to stabilize the
nominal exchange rate.
An
exchange rate is the price of one currency in terms of another.
Exchange rate, like price of any other commodity, is determined in a
market called Foreign Exchange market. Foreign exchange market is an
international financial market meant for exchange of various national
currencies. It is said that the Sun never sets on the foreign currency market
like on the erstwhile British Empire. Real exchange rate is commonly
known as a measure of international competitiveness. It is also known
as index of competitiveness of currency of any country and an
inverse relationship between this index and competitiveness exists.
Lower the value of this index in any country, higher the competitiveness of
currency of that country will be.
Inflation
not only creates problems within the economy, but also in the sphere of
external trade of a country, that is, countries trade balances with the rest of
the World. Country’s trade relations with the other countries involve exports
and imports of goods and services and how much a country will export and import
depends, amongst other thing, on the domestic price level and variation in it,
that is, the rate of inflation.
The interest rate at which banks can borrow
funds, in marketable size, from other banks in the Indian interbank market is
called MIBOR. The Mumbai Interbank Offered Rate (MIBOR) is calculated everyday
by the National Stock Exchange of India (NSEIL) as a weighted average of
lending rates of a group of banks, on funds lent to firstclass borrowers. The
MIBOR was launched on June 15, 1998 by the Committee for the Development of the
Debt Market, as an overnight rate. Since the launch, MIBOR rates have been used
as benchmark rates for the majority of money market deals made in India.
Objectives & Methodology
The
study with the objective of the exchange rate, inflation rate and MIBOR effects
on foreign trade with respect to import and export of current account, capital account
and overall positions of the trade. Using annual time series data, the Multiple
Regression analysis has been carried out for the period 200506 to 201314.
The study has taken independent variables i.e., exchange rate, inflation rate and
MIBOR and dependent variables i.e., exports and imports. Hence in order to
understand the effects of exchange rate, inflation rate and MIBOR changes on
trade balance, it is important to analyze how exchange rate, inflation rate and
MIBOR fluctuations affect the global trade.
Analysis and Discussion
The
multiple correlation coefficient indicates that the correlation among the
independent and dependent variables is positive and the statistic, which ranges
from 1 to +1, does not indicate statistical significance of this
correlation. The analysis of variance information provides the breakdown of the
total variation of the dependent variable in to the explained and unexplained
portions. The SS Regression is the variation explained by the regression line;
SS Residual is the variation of the dependent variable that is not explained.
The Fstatistic is calculated using the ratio of the mean square regression (MS
Regression) to the mean square residual (MS Residual). The results of the
estimated regression line include the estimated coefficients, the standard
error of the coefficients, the calculated tstatistic, the corresponding
pvalue, and the bounds of both the 95% confidence intervals.
Table 1: Multiple Regression Analysis of
Trinity effects on Current Account Credit
Regression Statistics

Multiple
R

0.900387006

R
Square

0.810696761

Adjusted
R Square

0.697114818

Standard
Error

1201880.632

Observations

9

ANOVA


df

SS

MS

F

Significance F

Regression

3

3.09309E+13

1.03103E+13

7.13755

0.029529

Residual

5

7.22259E+12

1.44452E+12

Total

8

3.81535E+13



Co
efficients

Standard
Error

t Stat

Pvalue

Lower 95%

Upper 95%

Intercept

13431242

3621940

3.708

0.013

4120746

22741737

Exchange
rate

341419

88271

3.867

0.011

568328

114511

Inflation

716223

194372

3.684

0.014

216572

1215874

MIBOR

108087

263202

0.410

0.698

784670

568495









Source: Secondary Data  Computed by Researcher
The
above table 1, shows that the multiple correlation coefficient is 0.900. The
coefficient of determination, R^{2}, is 81.06% and it means that close
to 81% of the variation in the dependent variable (Export) is explained by the
independent variables (Exchange Rate, Inflation Rate and Mumbai Interbank
offered Rate). The adjusted Rsquare, a measure of explanatory power, is
0.6971. The standard error of the regression is 1201880.632, which is an
estimate of the variation of the observed Export in billions, about the
regression line. The critical F value is 7.137 for 3 and 5 degrees of freedom
with 5% significance level. The independent variables that statistically
significant in explaining the variation in the export as indicated by the
calculated pvalues of Exchange Rate, Inflation Rate that are less than the
significance level of 5% and Mumbai Interbank offered Rate is less than the
significance level of 10%. The relationship between export and Inflation Rate
is positive. The coefficient of 716223 indicates, on average, an additional export
increases by 716223. The Exchange Rate and Mumbai Interbank offered Rate are negatively
related to the export. The coefficient of the Exchange Rate and Mumbai
Interbank offered Rate are 341419 and 108087 indicates, on average, an
additional export decreases by 341419 and 108087 respectively.
Table 2: Multiple Regression Analysis of
Trinity effects on Current Account Debit
Regression Statistics

Multiple
R

0.904545811

R
Square

0.818203125

Adjusted
R Square

0.709125

Standard
Error

1163477.784

Observations

9

ANOVA


df

SS

MS

F

Significance F

Regression

3

3.05E+13

1.02E+13

7.501074

0.02677

Residual

5

6.77E+12

1.35E+12

Total

8

3.72E+13



Co
efficients

Standard
Error

t Stat

Pvalue

Lower 95%

Upper 95%

Intercept

13676381

3506212

3.900

0.011

4663377

22689385

Exchange
rate

335548

85450

3.926

0.011

555207

115890

Inflation

691287

188162

3.673

0.014

207601

1174973

MIBOR

154438

254792

0.606

0.570

809403

500526









Source:
Secondary Data  Computed by Researcher
The
above table 2, shows that the multiple correlation coefficient is 0.904. The
coefficient of determination, R^{2}, is 81.80% and it means that close
to 82% of the variation in the dependent variable (Export) is explained by the
independent variables (Exchange Rate, Inflation Rate and Mumbai Interbank
offered Rate). The adjusted Rsquare, a measure of explanatory power, is 0.709.
The standard error of the regression is 1163477.784. The critical F value is
7.501 for 3 and 5 degrees of freedom with 5% significance level. The
independent variables that statistically significant in explaining the
variation in the export as indicated by the calculated pvalues of Exchange
Rate, Inflation Rate that are less than the significance level of 5% and Mumbai
Interbank offered Rate is less than the significance level of 10%. The
relationship between export and Inflation Rate is positive. The coefficient of 691287
indicates, on average, an additional export increases by 691287. The Exchange
Rate and Mumbai Interbank offered Rate are negatively related to the export.
The coefficient of the Exchange Rate and Mumbai Interbank offered Rate are 335548
and 154438 indicates, on average, an additional export decreases by 335548.8102
and 154438 respectively.
Table 3: Multiple Regression Analysis of
Trinity effects on Capital Account Credit
Regression Statistics

Multiple
R

0.917017

R
Square

0.84092

Adjusted
R Square

0.745472

Standard
Error

934170.5

Observations

9

ANOVA


df

SS

MS

F

Significance F

Regression

3

2.3065E+13

7.69E+12

8.810256

0.01935

Residual

5

4.3634E+12

8.73E+11

Total

8

2.7429E+13



Co
efficients

Standard
Error

t Stat

Pvalue

Lower 95%

Upper 95%

Intercept

11411170

2815179.84

4.053

0.009

4174520

18647820

Exchange
rate

289190

68609

4.215

0.008

465556

112823

Inflation

620835

151077

4.10

0.00

232477

1009193

MIBOR

118334

204575

0.578

0.588

644213

407545









Source:
Secondary Data  Computed by Researcher
The
above table 3, shows that the multiple correlation coefficient is 0.917. The
coefficient of determination, R^{2}, is 84.09% and it means that close
to 84% of the variation in the dependent variable (Export) is explained by the
independent variables (Exchange Rate, Inflation Rate and Mumbai Interbank
offered Rate). The adjusted Rsquare, a measure of explanatory power, is 0.745.
The standard error of the regression is 934170. The critical F value is 8.810 for
3 and 5 degrees of freedom with 5% significance level. The independent
variables that statistically significant in explaining the variation in the
export as indicated by the calculated pvalues of Exchange Rate, Inflation Rate
that are less than the significance level of 5% and Mumbai Interbank offered
Rate is less than the significance level of 10%. The relationship between
export and Inflation Rate is positive. The coefficient of 620835.3 indicates,
on average, an additional export increases by 620835.3. The Exchange Rate and
Mumbai Interbank offered Rate are negatively related to the export. The
coefficient of the Exchange Rate and Mumbai Interbank offered Rate are –289190 and
118334 indicates, on average, an additional export decreases by –289190 and 118334
respectively.
Table 4: Multiple Regression Analysis of
Trinity effects on Capital Account Debit
Regression Statistics

Multiple
R

0.905826

R
Square

0.82052

Adjusted
R Square

0.712832

Standard
Error

2236095

Observations

9

ANOVA


df

SS

MS

F

Significance F

Regression

3

1.14E+14

3.81E+13

7.619432

0.02595

Residual

5

2.5E+13

5E+12

Total

8

1.39E+14



Co
efficients

Standard
Error

t Stat

Pvalue

Lower 95%

Upper 95%

Intercept

26223333

6738608

3.891

0.011

8901189

43545476

Exchange
rate

652210

164228.5

3.971

0.010

1074372

230046

Inflation

1354643

361629

3.745

0.013

425043

2284241

MIBOR

264624

489687

0.540

0.612

1523405

994156









Source:
Secondary Data  Computed by Researcher
The
above table 4, shows that the multiple correlation coefficient is 0.905. The
coefficient of determination, R^{2}, is 82.05% and it means that close
to 82% of the variation in the dependent variable (Export) is explained by the
independent variables (Exchange Rate, Inflation Rate and Mumbai Interbank
offered Rate). The adjusted Rsquare, a measure of explanatory power, is 0.712.
The standard error of the regression is 2236095. The critical F value is 7.619 for
3 and 5 degrees of freedom with 5% significance level. The independent
variables that statistically significant in explaining the variation in the
export as indicated by the calculated pvalues of Exchange Rate, Inflation Rate
that are less than the significance level of 5% and Mumbai Interbank offered
Rate is less than the significance level of 10%. The relationship between
export and Inflation Rate is positive. The coefficient of 1354643 indicates, on
average, an additional export increases by 1354643. The Exchange Rate and
Mumbai Interbank offered Rate are negatively related to the export. The
coefficient of the Exchange Rate and Mumbai Interbank offered Rate are 652210 and
264624 indicates, on average, an additional export decreases by 652210 and 264624
respectively.
Table 5: Multiple Regression Analysis of
Trinity effects on Overall Account Credit
Regression Statistics

Multiple
R

0.905825732

R
Square

0.820520256

Adjusted
R Square

0.71283241

Standard
Error

2236094.65

Observations

9

ANOVA


df

SS

MS

F

Significance F

Regression

3

1.14294E+14

3.81E+13

7.619432

0.02595

Residual

5

2.50006E+13

5E+12

Total

8

1.39295E+14



Co
efficients

Standard
Error

t Stat

Pvalue

Lower 95%

Upper 95%

Intercept

26223332

6738608

3.891

0.011

8901189

43545476

Exchange
rate

652209

164228

3.971

0.010

1074372

23004

Inflation

1354642

361629

3.745937

0.01335

425043476

2284241

MIBOR

264624

489687

0.540

0.612

1523405

994156









Source:
Secondary Data  Computed by Researcher
The
above table 5, shows that the multiple correlation coefficient is 0.905. The
coefficient of determination, R^{2}, is 82.05% and it means that close
to 82% of the variation in the dependent variable (Export) is explained by the
independent variables (Exchange Rate, Inflation Rate and Mumbai Interbank
offered Rate). The adjusted Rsquare, a measure of explanatory power, is 0.712.
The standard error of the regression is 2236094. The critical F value is 7.619 for
3 and 5 degrees of freedom with 5% significance level. The independent variables
that statistically significant in explaining the variation in the export as
indicated by the calculated pvalues of Exchange Rate, Inflation Rate that are
less than the significance level of 5% and Mumbai Interbank offered Rate is
less than the significance level of 10%. The relationship between export and
Inflation Rate is positive. The coefficient of 1354642 indicates, on average,
an additional export increases by 1354642. The Exchange Rate and Mumbai
Interbank offered Rate are negatively related to the export. The coefficient of
the Exchange Rate and Mumbai Interbank offered Rate are 652209 and 264624 indicates,
on average, an additional export decreases by 652209 and 264624 respectively.
Table 6: Multiple Regression Analysis of
Trinity effects on Overall Account Debit
Regression Statistics

Multiple
R

0.909039

R
Square

0.826351

Adjusted
R Square

0.722162

Standard
Error

2131660

Observations

9

ANOVA


df

SS

MS

F

Significance F

Regression

3

1.08118E+14

3.60395E+13

7.931264

0.02395277

Residual

5

2.27199E+13

4.54398E+12

Total

8

1.30838E+14



Co
efficients

Standard
Error

t Stat

Pvalue

Lower
95%

Upper 95%

Intercept

24777962

6423888

3.857

0.011914

8264829

41291094

Exchange
rate

632678

156558

4.0411

0.009

1035124

230232

Inflation

1347275

344740

3.908

0.011

461091

2233458

MIBOR

217816

466816

0.466

0.660

1417807

982174









Source:
Secondary Data  Computed by Researcher
The
above table 6, shows that the multiple correlation coefficient is 0.909. The
coefficient of determination, R^{2}, is 82.60% and it means that close
to 83% of the variation in the dependent variable (Export) is explained by the
independent variables (Exchange Rate, Inflation Rate and Mumbai Interbank
offered Rate). The adjusted Rsquare, a measure of explanatory power, is 0.722.
The standard error of the regression is 2131660. The critical F value is 7.931 for
3 and 5 degrees of freedom with 5% significance level. The independent
variables that statistically significant in explaining the variation in the export
as indicated by the calculated pvalues of Exchange Rate, Inflation Rate that
are less than the significance level of 5% and Mumbai Interbank offered Rate is
less than the significance level of 10%. The relationship between export and
Inflation Rate is positive. The coefficient of 1347275 indicates, on average,
an additional export increases by 1347275. The Exchange Rate and Mumbai
Interbank offered Rate are negatively related to the export. The coefficient of
the Exchange Rate and Mumbai Interbank offered Rate are 632678 and 217816 indicates,
on average, an additional export decreases by 632678 and 217816 respectively.
Conclusion
The
exchange rate and MIBOR have significant negative impact on exports and
imports, but inflation rate has significant positive impact on exports and imports
of current account, capital account and overall account in India. It reveals
that these factors are playing crucial role on import and export of our
economy. The government and the authority should concentrate on the control
over volatility in exchange rate, inflation rate, MIBOR will give positive
impact on foreign trade in India. Hence, the stability in exchange rate,
inflation rate, MIBOR will increase the export and decrease the import activities
in India.
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