Dollar Liquidity, Trade Invoicing, and Real Effects: Evidence from India

45 Pages Posted: 18 Mar 2021 Last revised: 20 Mar 2021

See all articles by Apoorva Javadekar

Apoorva Javadekar

Indian School of Business

Gautham Udupa

CAFRAL

Shekhar Tomar

Indian School of Business

Date Written: March 17, 2021

Abstract

We provide causal evidence on the linkage between dollar liquidity and dollar invoicing exploiting an unanticipated shock to the dollar financing around the Taper Tantrum. Using the differential funding shock across countries, we test the impact of dollar liquidity on invoicing and imports by Indian firms using transaction-level data. We find that (i) firm-level dollar invoicing drops in response to dollar funding shock with corresponding rise in Euro and producer currency pricing, (ii) local presence of foreign banks allows Indian firms to smooth-out the liquidity shock, and (iii) firms transfer liquidity from one market to another using their internal capital markets to smooth-out country specific funding shocks. We document that firms unable to maintain the level of dollar invoicing are more likely to lose a trade connection.

Keywords: Dollar Invoicing, Taper Tantrum, Dollar Liquidity Shock

JEL Classification: F32, F40, G15

Suggested Citation

Javadekar, Apoorva and Udupa, Gautham and Tomar, Shekhar, Dollar Liquidity, Trade Invoicing, and Real Effects: Evidence from India (March 17, 2021). Available at SSRN: https://ssrn.com/abstract=3806450 or http://dx.doi.org/10.2139/ssrn.3806450

Apoorva Javadekar (Contact Author)

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Gautham Udupa

CAFRAL ( email )

C-8, 8th Floor, Reserve Bank of India
Bandra-Kurla Complex, Bandra (East)
Mumbai, Maharashtra 400051
India

HOME PAGE: http://https://sites.google.com/site/gautamudupa/home

Shekhar Tomar

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

HOME PAGE: http://shekhartomar.com

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