Foreign Exchange Reserves and India’s Import Demand: A Cointegration and Vector Error Correction Analysis

Abstract

The paper investigates the aggregate import demand function for India using Johansen's cointegration method. The result shows that there is a long run equilibrium relationship between real imports, real income, relative price of imports and real foreign exchange reserves. In the long run, import is found to be elastic with respect to income, and inelastic with respect to relative price and foreign reserves. In the short run also, we find a significant relationship between import, income, relative price and foreign exchange reserves. However in the short run, import is found to be inelastic with respect to all of these variables. The evidence suggests that depreciation may not give desirable results for the economy as far as containing the import bill is concerned. The promotion of export would be a better option to take care of problem of trade deficits. [PUBLICATION ABSTRACT]