IDEAS home Printed from https://ideas.repec.org/a/sae/mareco/v19y2025i2p131-186.html

Corporate Foreign Exchange Risk in India: Firm-level Evidence and Some Policy Implications

Author

Listed:
  • Rohit Goel

    (Rohit Goel is a Visiting Fellow at the National Council of Applied Economic Research (NCAER), New Delhi, India, and is the Head of Global Macro, Breakout Capital Partners, LP, New York, USA. E-mail: RGoel@breakout-capital.com)

  • Swapnanil SenGupta

    (Swapnanil SenGupta (corresponding author) is at the Department of Economics, Goethe University Frankfurt, Germany. E-mail: Sengupta@wiwi.uni-frankfurt.de)

  • Udaibir Saran Das

    (Udaibir Saran Das is a Visiting Professor at NCAER, New Delhi, India. E-mail: udas@ncaer.org)

Abstract

As India’s economy becomes more integrated with global capital markets, the foreign exchange (FX) exposure of non-financial corporations deserves closer scrutiny. This article presents the first firm-level empirical study of foreign-currency borrowing by Indian non-financial corporations, using a matched panel of 38,589 firms from 2009 to 2023. Using local projections, we estimate how changes in balance-sheet fundamentals—leverage, export intensity, profitability, asset returns and the interest coverage ratio—translate into different forms of foreign borrowing. We find that when leverage increases and export intensity rises, firms raise foreign-currency borrowing, whereas weakening profitability is associated with lower foreign borrowing; responses vary by instrument and by firm type. State-owned enterprises (SOEs) and small and medium-sized enterprises (SMEs) appear particularly vulnerable, often increasing FX exposure when fundamentals deteriorate. India ranks mid-table on corporate dollarisation but near the bottom on hedge ratios. A stress test that simulates a 20 per cent rupee depreciation shows that 12 per cent of firms have an interest coverage ratio below one, revealing hidden vulnerabilities. The findings suggest the need for granular FX exposure disclosure, calibrated hedge norms and differentiated prudential oversight. As India pursues its 2,047 growth ambitions, effective FX risk management is a core pillar of macroeconomic and financial stability. JEL Codes: F31, G15, G32, O16

Suggested Citation

  • Rohit Goel & Swapnanil SenGupta & Udaibir Saran Das, 2025. "Corporate Foreign Exchange Risk in India: Firm-level Evidence and Some Policy Implications," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 19(2), pages 131-186, November.
  • Handle: RePEc:sae:mareco:v:19:y:2025:i:2:p:131-186
    DOI: 10.1177/00252921251401022
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/00252921251401022
    Download Restriction: no

    File URL: https://libkey.io/10.1177/00252921251401022?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(2), pages 127-140, June.
    2. Mr. Andre O Santos & Mr. Jorge A Chan-Lau, 2006. "Currency Mismatches and Corporate Default Risk: Modeling, Measurement, and Surveillance Applications," IMF Working Papers 2006/269, International Monetary Fund.
    3. Sur, Abhisek & Ray, Partha & Nandy, Amarendu, 2019. "India’s external commercial borrowing: Pulled by domestic fundamentals or pushed by global conditions?," Journal of Asian Economics, Elsevier, vol. 61(C), pages 65-77.
    4. Allayannis, George & Weston, James P, 2001. "The Use of Foreign Currency Derivatives and Firm Market Value," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 243-276.
    5. Sur, Abhisek & Nandy, Amarendu & Ray, Partha, 2024. "Does foreign currency borrowing make firms vulnerable? Experience of emerging India," Journal of Policy Modeling, Elsevier, vol. 46(3), pages 530-551.
    6. John R. Graham & Daniel A. Rogers, 2002. "Do Firms Hedge in Response to Tax Incentives?," Journal of Finance, American Finance Association, vol. 57(2), pages 815-839, April.
    7. Purnanandam, Amiyatosh, 2008. "Financial distress and corporate risk management: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 87(3), pages 706-739, March.
    8. Alan J. Auerbach & Yuriy Gorodnichenko, 2013. "Output Spillovers from Fiscal Policy," American Economic Review, American Economic Association, vol. 103(3), pages 141-146, May.
    9. Froot, Kenneth A. & Scharfstein, David S. & Stein, Jeremy C., 2008. "Risk management: coordinating corporate investment and financing policies," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 48(1), January.
    10. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2023. "Yet it Endures: The Persistence of Original Sin," Open Economies Review, Springer, vol. 34(1), pages 1-42, February.
    11. Sensarma, Rudra & Bhattacharyya, Indranil, 2016. "The impact of monetary policy on corporate bonds in India," Journal of Policy Modeling, Elsevier, vol. 38(3), pages 587-602.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gatopoulos, Georgios & Loubergé, Henri, 2013. "Combined use of foreign debt and currency derivatives under the threat of currency crises: The case of Latin American firms," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 54-75.
    2. Jose M. Berrospide & Amiyatosh Purnanandam & Uday Rajan, 2008. "Corporate hedging, investment and value," Finance and Economics Discussion Series 2008-16, Board of Governors of the Federal Reserve System (U.S.).
    3. Oberoi, Jaideep, 2018. "Interest rate risk management and the mix of fixed and floating rate debt," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 70-86.
    4. Ilona Babenko & Hendrik Bessembinder & Yuri Tserlukevich, 2024. "Risk Hedging and Loan Covenants," Management Science, INFORMS, vol. 70(11), pages 8067-8095, November.
    5. Chongwu Xia & Chuyi Yang & Lei Zhang, 2021. "The real effect of foreign exchange hedging on corporate innovation," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(12), pages 2046-2078, December.
    6. Zheng Qiao & Chongwu Xia & Lei Zhang, 2020. "Does corporate hedging affect firm valuation? Evidence from the IPO market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(6), pages 895-927, June.
    7. Cornaggia, Jess, 2013. "Does risk management matter? Evidence from the U.S. agricultural industry," Journal of Financial Economics, Elsevier, vol. 109(2), pages 419-440.
    8. Mohamed A. Ayadi & Donald A. Cyr & Skander Lazrak & Zhangwei Lu, 2024. "Firm value and the use of financial derivatives: Evidence from developed countries," Review of Financial Economics, John Wiley & Sons, vol. 42(3), pages 258-280, July.
    9. Georges Dionne & Thouraya Triki, 2005. "Risk management and corporate governance: The importance of independence and financial knowledge for the board and the audit committee," Working Papers 05-3, HEC Montreal, Canada Research Chair in Risk Management.
    10. Dionne, Georges & El Hraiki, Rayane & Mnasri, Mohamed, 2023. "Determinants and real effects of joint hedging: An empirical analysis of US oil and gas producers," Energy Economics, Elsevier, vol. 124(C).
    11. Mohamed Mnasri & Georges Dionne & Jean-Pierre Gueyie, 2013. "The Maturity Structure of Corporate Hedging: the Case of the U.S. Oil and Gas Industry," Cahiers de recherche 1337, CIRPEE.
    12. Oliver Entrop & Matthias F. Merkel, 2020. "Managers’ research education, the use of FX derivatives and corporate speculation," Review of Managerial Science, Springer, vol. 14(4), pages 869-901, August.
    13. Hege, Ulrich & Hutson, Elaine & Laing, Elaine, 2018. "The impact of mandatory governance changes on financial risk management," TSE Working Papers 18-889, Toulouse School of Economics (TSE).
    14. Massimo Massa & Lei Zhang, 2018. "Does corporate hedging attract foreign institutional investors? Evidence from international firms," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(5), pages 605-632, July.
    15. Bartram, Söhnke M. & Brown, Gregory W. & Conrad, Jennifer, 2011. "The Effects of Derivatives on Firm Risk and Value," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 967-999, August.
    16. Lau, Chee Kwong, 2016. "How corporate derivatives use impact firm performance?," Pacific-Basin Finance Journal, Elsevier, vol. 40(PA), pages 102-114.
    17. Nevi Danila & Chia-Hsing Huang, 2016. "The determinants of exchange rate risk management in developing countries: evidence from Indonesia," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 6(1), pages 53-67.
    18. Söhnke M. Bartram & Gregory W. Brown & Frank R. Fehle, 2009. "International Evidence on Financial Derivatives Usage," Financial Management, Financial Management Association International, vol. 38(1), pages 185-206, March.
    19. Chen, Jun & King, Tao-Hsien Dolly, 2014. "Corporate hedging and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 221-245.
    20. Hong Zou, 2010. "Hedging Affecting Firm Value via Financing and Investment: Evidence from Property Insurance Use," Financial Management, Financial Management Association International, vol. 39(3), pages 965-996, September.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:mareco:v:19:y:2025:i:2:p:131-186. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://www.ncaer.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.