The consequences of exchange rate trends on international tourism demand: evidence from India

Abstract

Exchange rate is frequently considered as a key determinant in international tourism demand models. Tourism export is one of the major sources of India’s foreign exchange earnings. So understanding the dynamics of exchange rate and tourism is essential for planning and execution of tourism policies. This paper empirically investigates the extent to which exchange rate fluctuations affect India’s international tourism receipts. In order to achieve this goal, the paper employed quarterly data ranging from 2003Q1 to 2017Q4 within an Autoregressive Distributed Lag (ARDL) framework. Using Wald coefficients, the study found cointegration among the variables. It further discovered that variables are correcting the shock-induced disequilibrium at a high speed of 96%. Furthermore, the study established a significantly negative link between exchange rate and international tourism receipt. We also found that the overall impact of the exchange rate is time-invariant, i.e. having similar long-run and short-run impacts on international tourism demand, though the short-run magnitude is higher than the long-run one. The outcomes of this study help practitioners to frame suitable policies to manage their currency exposure. Based on findings, the study suggests better management of the exchange rate to protect the external competitiveness of rupee for attracting more foreign tourists. Moreover, development of innovative hedging instruments helps to reduce currency exposure of international tourists.