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Why do Indian Firms Borrow in Foreign Currency?

Author

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  • Ashis Kumar Pradhan

    (Ashis Kumar Pradhan (corresponding author) is an Assistant Professor at Department of Humanities, Maulana Azad National Institute of Technology, Bhopal, India.)

  • Gourishankar S. Hiremath

    (Gourishankar S. Hiremath is an Associate Professor in the Department of Humanities and Social Sciences, Indian Institute of Technology Kharagpur, India.)

Abstract

We investigate why firms in emerging economies such as India borrow in foreign currency. The results of a dynamic panel regression approach suggest that both firm-specific factors and macroeconomic factors are significant in explaining the corporate sector dollarization. Export revenue and tangible assets are primary drivers of the external commercial borrowings (ECBs) of non-financial firms, whereas the ECBs of financial firms are sensitive to interest rates in global markets. The policy measures to relax restrictions on firm borrowing in foreign currency facilitate the denomination of corporate debt in foreign currency, but such exposure was adversely affected by the global financial crisis. The findings of the study suggest the vital need to develop the domestic bond market to reduce firms’ dependency on external finance. The results also call for competitive interest rates in the domestic fixed income segment through monetary policy intervention. JEL Classification: G300, G320, F310

Suggested Citation

  • Ashis Kumar Pradhan & Gourishankar S. Hiremath, 2020. "Why do Indian Firms Borrow in Foreign Currency?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(2), pages 191-211, May.
    • Handle: RePEc:sae:mareco:v:14:y:2020:i:2:p:191-211
    DOI: 10.1177/0973801020904492
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    Cited by:

    1. Ashis Kumar Pradhan & Gourishankar S Hiremath, 2020. "Do external commercial borrowings and financial development affect exports?," Cogent Business & Management, Taylor & Francis Journals, vol. 7(1), pages 1796269-179, January.

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