Exchange Rate Exposure and its Determinants: Evidence from Indian Firms

ABSTRACT

This article examines the determinants of the exchange rate exposure by comparing both manufacturing and service sector firms in India over the period of 2000 to 2013. First, the study finds that service sector firms are more exposed to exchange rate changes than manufacturing firms in India. Second, the results indicate that the market-to-book ratio and export are significant and positively related; however, size is negatively related to the exchange rate exposure of both the manufacturing and service sector firms. These results are robust with the estimation using a trade-weighted exchange rate.

KEYWORDS:

• Debt ratio
• exchange rate exposure
• market to book
• panel data
• size

Acknowledgments

The authors gratefully acknowledge the suggestions of the editor and two anonymous referees on the previous draft of this article. The usual disclaimer applies.

Notes

¹ The industries selected for the manufacturing sector are petroleum (for both export and import), gems and jewelry, machinery (except electrical and electronics, electronics goods, and machinery instruments). The industries selected for the service sector are communication, IT, transport services for export and import, hotel, and wholesale and retail.

² USD is the Indian currency against the U.S. dollar and NEER is the 36 countries’ Nominal Effective Exchange Rate Index.

³ Currency basket or trade-weighted exchange rate.

⁴ This estimation follows the OLS approach.