Impact of exchange rate pass-through and volatility on Indian foreign trade

Abstract

The exchange rate Pass-through land exchange rate volatility, are two important issues that determine the effectiveness of the exchange rate depreciation in achieving the desired trade balance. The aggregate analysis of Indian imports and exports with quarterly data from 1980 to 1996 attempted in the present paper has shown that the exchange rate pass through is complete for the import prices before and after 1991 policy reforms. Export prices, on the other hand, exhibited near full pass-though only after 1991. The study also indicated that the export quantities show resistance to the changes in the exchange rate, while the import quantities show resistance to the changes in the exchange rates. The adverse impact of the exchange rate volatility on price realisation has not transmitted to the quantities traded in both the exports as well as imports in India. The study reveals India s lack of bargaining power in the international markets both as a buyer and as a seller. It is argued that the economic reforms have strengthened the market forces by making them more responsive to the price signals. The study also indicates that targeting REER in India may not satisfactorily address the concerns for the trade balance, though it may be useful for export promotion.