Exchange Rate Pass-through: An exploration on India’s automobile sector

This study is aimed at estimating the Exchange Rate Pass Through (ERPT) to export prices of Indian Automobiles at HS 8 digit level classification. Using profit maximising approach of firms, in lines of Bailliu and Fujii (2004) theoretical specification this paper estimates the ERPT elasticities in the ambit of dynamic panel data technique. While the pass through is quite low for tractors and bicycles, the elasticities are high for vehicular spare parts and fighting equipment like tankers etc. Unlike in the short run, the pass through is relatively high in the long run. The dynamic panel results at the aggregate level show that trade openness and world demand are statistically significant variables in explaining the volatility of export prices in a small open economy like India. The findings on exchange rate pass through have implications for exchange rate being used as an important policy instrument for export promotion and growth on one hand, and in reducing current account deficit, on the other hand.