Exchange Rate Changes on Prices and Volume of Trade Flows in India

This book investigates the impact of exchange rate pass-through into export, import and domestic prices in Indian context. The Indian exporter has some market power in external markets, and practices pricing to market. This result has to be viewed in the context of a generally depreciating rupee.The results of the study, insofar as pass-through into import prices is concerned, show more than complete pass-through which shows Indian importer has no bargaining power as a buyer in the international market. The more-than-complete pass-through could be a reflection of the fact that a large part of India’s imports are in the form of necessary inputs into production with inelastic demand. The results cast a question mark over the efficacy of exchange rate changes as a policy tool in correcting trade balances, and also point to the risk of imported inflation. An accurate measure of pass-through to trade prices is therefore a necessary step in understanding, how the trade balance reacts to a change in the exchange rate.We also examine the short-run and long-run effects of real exchange rate changes on India’s trade balance both bilateral and aggregate level.