^*Sushanta Mallick is a Senior Lecturer in International Finance at Queen Mary, University of London, United Kingdom. Helena Marques is a Senior Lecturer in Economics and International Business at the University of Manchester, United Kingdom. The authors gratefully acknowledge the constructive comments made by an anonymous referee of this journal and by the editor, Robert Flood, on an earlier version of this paper. The authors have benefited from comments and suggestions by participants at the 10th International Conference on Macroeconomic Analysis and International Finance (University of Crete, May 2006), International Atlantic Economic Conference (New York, October 2005), European Economic Association 20th Annual Congress (August 24–27, 2005, Amsterdam), Royal Economic Society Annual Conference (University of Nottingham, April 2005), and the European Economics and Finance Society 5th Annual Meeting (University of Coimbra, Portugal, May 2005), as well as seminar participants at the Leverhulme Centre for Research on Globalisation and Economic Policy (University of Nottingham), the Joint Development Economics seminar at Institute for Development Policy and Management and Economics Department (University of Manchester), and Loughborough and Keele Universities. Also thanks are due to seminar participants at the Institute of Economic Growth, Delhi; University of Hyderabad; Institute for Social and Economic Change, and Institute of Chartered Financial Analysts of India Business School, Bangalore; and Academic Staff College, Jawaharlal Nehru University, New Delhi. The authors are grateful for the useful comments of Michael Arghyrou, Robin Bladen-Hovell, Huw Dixon, Ben Ferrett, David Greenaway, Jong-Hee Hahn, Chris Milner, Theo Panagiotidis, Christian Richter, Daniel Seidmann, and Kunal Sen.

Abstract

In the 1990s, India initiated extensive policy reforms that included the adoption of a flexible exchange rate regime and an acceleration of trade liberalization. This paper analyzes the impact of the policy reforms on exchange rate pass-through into export prices using sectoral panel data (at the two-digit Standard International Trade Classification level) for the pre-reform (1980–90) and post-reform (1991–2001) periods. Several econometric tests revealed the existence of a structural break in pass-through into export prices around 1991. The panel results suggest that the number of industries exhibiting incomplete pass-through increased in the 1990s relative to the 1980s, reflecting a higher degree of pricing power by these firms as export prices react to exchange rate changes in more sectors, after having controlled for the effect of product shares, marginal cost variations, and a macroeconomic policy index. These changes in pass-through behavior may be partly 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 make profits as a result of depreciation in the 1980s.