How sensitive is commodity trade flows between US and India to currency depreciation?

Abstract

Previous studies that investigated the impact of real depreciation of the rupee on Indian trade balance used aggregate trade data and provided no support for real depreciation to be effective in improving India's trade balance. In this article we disaggregate the Indian trade data by commodity and consider the sensitivity of each industry's inpayments (export value) and outpayments (import value) to real rupee–dollar exchange rate. Annual data over the period of 1962 to 2004 from 40 industries that trade between the two countries as well as bounds testing approach are used to show that while in half of the industries real depreciation of rupee has short-run effects on inpayments and outpayments, the short-run effects do not last into the long-run in majority of the cases.