The asymmetric impact of exchange rate misalignment on economic growth of India: An application of Hodrick–Prescott filter technique

Abstract

Prior research that examined the effect of exchange rate misalignment on economic growth was based on the symmetric approach, which suggested that both overvalued and undervalued exchange rates would have a similar effect on economic growth. Recent studies, however, have demonstrated that the exchange rate tends to have an asymmetric effect on major economic variables such as trade flows and output economic growth. The current study seeks to explore the asymmetric effects of exchange rate misalignment on India’s economic growth. The findings demonstrate that. in the symmetric approach scenario, exchange rate misalignment negatively impacts India’s economic growth. However, after employing the non-linear ARDL technique, the study indicates significant evidence in favor of asymmetric effects. Intriguingly, the findings show that undervaluation promotes economic growth in the case of the Indian economy whereas overvaluation tends to affect it negatively. The study concludes that while an undervalued exchange rate may provide short-term economic respite, a market-based equilibrium exchange rate is essential for a growing economy like India.