Exchange Rate Pass-Through in India's Exports to Developed and Emerging Markets

Abstract

This paper studies the pricing to market (PTM) behaviour of Indian exporters during the economic reforms period (1992-2005). A PTM model has been estimated using panel data at the four-digit level of classification for the G3 and three emerging markets (Brazil, China and South Africa), distinguishing also homogeneous from differentiated goods. Overall, we observe that there is clear evidence of incomplete exchange rate pass-through (ERPT) to buyers' currency prices. This degree of ERPT is net of changes in the level of protection faced by India's exporters (import tariffs in destination markets), inflation and openness in the export destination market, a macroeconomic policy index partly reflecting changes in exporter's costs, the share of the exporter in the destination market and the share of the product in the exporter's total exports. When distinguishing between G3 and emerging markets, the empirical results indicate that Indian firms do practice PTM and have some pricing power in G3 markets, but they fully pass-through the exchange rate changes in emerging markets. On the contrary, Indian exporters seem to be taking advantage of trade liberalization in destination markets by marginally increasing the exporter currency prices into emerging markets but not into the G3. We also find a similar impact of trade liberalization in the case of differentiated goods.

Keywords: exchange-rate pass-through, pricing-to-market, product differentiation, India

JEL Classification: F4, O1