Desirability of Competition in Currency of Invoicing: Evidence from India

Abstract

Two stylized facts underline the US dollar’s role in the world financial markets namely 1)

dominance of dollar denomination in the cross-border asset/debt markets as well as for inter-

national trade transactions, and 2) country- and firm-level dollar invoicing shares are stable.

This paper, using transaction-level import data and exploiting an unanticipated US monetary

policy action, documents that Indian importers reduce the share of dollar invoiced imports

by 11.9% in response to a 1 percentage point decline in the cross-border dollar credit supply,

challenging the second stylized fact and providing causal evidence in support of complementarities between dollar-denominated debt and trade contracts. Importers substitute dollar invoicing with Euro invoicing after the decline in dollar credit. Prior research documents

substantial losses to trade volume and relationships following trade credit supply shocks. We

establish a novel dollar invoicing channel by documenting that these losses are concentrated

among firms unable to substitute away from dollar invoicing. In essence, we highlight that

flexibility in trade invoicing currency acts as a shock absorber against currency-specific credit

shocks, while inflexibility amplifies the adverse effects of credit shocks on trade. Lastly, global

banks shield trade by supporting invoicing in alternate currencies.