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Journal of Humanities, Arts and Social Science

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ArticleOpen Access http://dx.doi.org/10.26855/jhass.2026.09.009

Exchange Rate Dynamics and Bilateral Trade Balance Adjustment in India: Revisiting the J-Curve Hypothesis

Riddhi Mehta1, Arshad Bhat2,*

1School of Economics, SVKM's Narsee Monjee Institute of Management Studies, Kharghar, Navi Mumbai, Maharashtra 400056, India.

2Amity Institute of Liberal Arts, Amity University Mumbai, Maharashtra 410207, India.

*Corresponding author: Arshad Bhat

Published: September 15, 2026

Abstract

The J-curve hypothesis has been used for a long time to analyze the relationship between exchange rate fluctuations and adjustment in the trade balance, especially in developing economies. This paper re-tests the existence of the bilateral J-curve effect in the case of India using monthly data and a multivariate time-series model that accounts for both the short-run dynamics and the long-run relationships. The evaluation is based on the bilateral trade of India with the 5 top trading partners, namely the United States, China, Japan, Germany, and the United Arab Emirates, during the years 1991-2024. Unit-root tests, Johansen cointegration tests, and Vector Error Correction Models are utilized where they are statistically and diagnostically appropriate. The findings suggest that bilateral trade relations of India do not depict a strong/systematic J-curve effect. There is also long-run cointegration of the limited number of trading partners and no long-run consistent relationship between the real exchange rate and the trade balance of China and Japan. Even though cointegration is found to be the case in Germany, the instability of the parameters is indeed high, due to probable macroeconomic and structural shocks within the Eurozone, which restricts the accuracy of the dynamic VECM estimation. In the case of the United Arab Emirates and the United States, there are weak and statistically insignificant adjustment dynamics in the error-correction mechanisms and impulse response analyses after the exchange rate shocks. Altogether, the results indicate that the adjustment mechanisms, based on exchange rates, have a minor impact on the bilateral balance of Indian trade, and the structural factors prevail in the dynamics of trade. These findings have significant implications for exchange rate management and other external sector policy in India.

Keyword

J-curve hypothesis; bilateral trade; exchange rate dynamics; cointegration; vector error correction model

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How to cite this paper

Exchange Rate Dynamics and Bilateral Trade Balance Adjustment in India: Revisiting the J-Curve Hypothesis

How to cite this paper: Riddhi Mehta, Arshad Bhat. (2026) Exchange Rate Dynamics and Bilateral Trade Balance Adjustment in India: Revisiting the J-Curve Hypothesis. Journal of Humanities, Arts and Social Science, 10(9), 1078-1094.

DOI: http://dx.doi.org/10.26855/jhass.2026.09.009