SECTORAL EXCHANGE RATE PASS‐THROUGH: TESTING THE IMPACT OF POLICY REFORMS IN INDIA

ABSTRACT This paper analyses the impact of India's policy reforms on exchange rate pass‐through into import and export prices, using panel data (at one‐digit SITC level) for pre‐ (1980–90) and post‐reform (1991–2001) periods. While the pass‐through into import prices has declined, the pass‐through into export prices (in USD terms) has increased during the 1990s. The results suggest that, relative to rupee depreciation, Indian exporters increased their USD prices around 20% in the 1980s, but decreased them by around 70% in the 1990s. Moreover, the number of sectors exhibiting some degree of pass‐through increased in the 1990s (six), relative to the 1980s (three). These changes may be attributable to the elimination of currency and trade controls, which increased competition among firms and fostered a concern with market share gains in the 1990s over an attempt to use depreciations to increase profits in the 1980s.