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: India has seen greater integration with the world economy through trade in goods and services, and through financial integration, over the past two decades. The literature on developed countries suggests that increasing trade intensity leads to business cycle synchronisation, but there is no consensus, either in the theory or in the evidence, on what might come about with developing economies. This has given rise to the debate about a possible ‘decoupling’ of the business cycle in emerging markets, especially in India and China, from that found in developed countries.

While anecdotal evidence for India suggests increased linkages with the world, the systematic evidence on this is limited. In this paper, we use output and trade data on India and the rest of the world to investigate two questions:

1.Has there been a change in business cycle synchronisation over time between India and the rest of the world?

2.Does India have particularly strong linkages with the US, or is the comovement stronger with a broad set of industrial countries?

It can be seen that these questions are only of correlation and not causation. In the context that there is no consensus in the literature on the impact of increasing trade and financial liberalisation on business cycle integration, establishing or rejecting the synchronisation hypothesis is in itself an important element in the debate.

Over the past two decades, India has seen several economic and institutional changes, including in its exchange rate regime, monetary policy framework, financial regulatory framework and trade policy structure. Given this institutional environment, the case for trend-cycle interaction is strengthened, and we do not detrend the data to isolate the business cycle. Rather, we study the trend-cyclical component of seasonally adjusted data. In order to address the “classical expansion” faced by the emerging markets, where all measures of output have been on a steady increase over the past decade or so, we modify this approach to study cyclical fluctuations in annualised point-on-point growth rates of output. Effectively, we are studying growth rate cycles.