EXCHANGE RATE PASS-THROUGH IN INDIA'S EXPORT PRICES

This paper discusses the concept of exchange rate pass-through (ERPT) in export prices. Exchange rate variations affect international price-competitiveness of exports and their profitability in domestic currency terms. ERPT for exports refers to the degree to which exchange rate changes affect prices of traded goods measured in importer's currency, i.e., whether changes in exchange rates are passed on to foreign consumers or absorbed by exporters, to retain market shares, by maintaining stable prices in international markets. The choice depends on the assumptions regarding the international market structure and product differentiation. Magnitude and speed of pass-through helps understand the relation between exchange rate changes and its impact on trade balance. In this paper, we estimate the ERPT for Indian aggregate non-oil exports and find low pass-through over the long period between 1960-2007. The magnitude increases slightly in the post-1991 period in the wake of competitive currency adjustments by many developing countries. It can thus be argued that currency adjustments alone cannot bring about an adjustment in current balance. There is a need to pay attention to commodity mix and aspects of non-price competitiveness to improve shares in world exports.