Modeling Real Effective Exchange Rate Misalignment and Its Impact on India’s Economic Growth

This paper examines the effect of real effective exchange rate misalignment on economic growth in the case of India. By using quarterly data from 2004Q2 to 2023Q4, the study estimates the exchange rate misalignment through BEER and NATREX approaches. Misalignment calculated using BEER and NATREX shows similar trends with periods of undervaluation observed during 2008 Q1–2010 Q1, 2011 Q4–2014 Q4 and in intervals between 2018 Q2 to 2023 Q4. However, misalignment calculated using NATREX showed greater overvaluation as compared to BEER. We further gauge the asymmetric interplay between misalignment and economic growth in India by employing NARDL technique. Results show that undervaluation positively impacts economic growth while overvaluation negatively impacts growth in short run. Undervaluation negatively impacts growth in the long run. The sensitivity analysis further cements our findings for misalignment-growth nexus. The findings underscore the need for policy interventions to balance REER misalignment to sustain economic growth.