| Pub. Date | : October, 2021 |
|---|---|
| Product Name | : The IUP Journal of Accounting Research and Audit Practices |
| Product Type | : Article |
| Product Code | : IJARAP121021 |
| Author Name | : M V S Kameshwar Rao* and Ranajee** |
| Availability | : YES |
| Subject/Domain | : Finance |
| Download Format | : PDF Format |
| No. of Pages | : 18 |
The paper studies the meager evidence on currency exposure of Indian companies. It addresses three research questions. What is the long-term currency exposure (FX Equity Beta) of listed firms in India? Does it show cross-sectional variation in firms and variation across industries? Is it time varying? With NSE 100 firms, currency exposure of equity returns to US Dollar (USD) is estimated at portfolio and firm levels for the period 2001-2016, and also for two sub-periods 2001-2008 and 2008-2016. Robustness of the estimates is verified using Composite Exchange Rate (CER). Long-term FX Equity Beta of Indian firms is negative and time varying, and varies across industries and firms. This evidence is contrary to the thinking that currency depreciation is good for emerging economies. The forex beta of the equity portfolio of NSE 100 firms to USD (CER) is -1.352 (-1.352), for 2001-2016; -1.718 (-1.704) for 2001-2008, and -1.283 (-1.256) for 2008-2016. Mean firm level FX Equity Beta on USD (CER) is -1.601 (-1.551) for 2001-2016; -2.078 (-1.875) for 2001-2008, and -1.667 (-1.803) for 2008- 2016. Mean FX Equity Beta on USD (CER) of financial services firms is -2.221 (-2.215) and that of IT firms is -0.47 (-0.56).
Indian companies are exposed to currency volatility due to their international business transactions involving exchange of currency. Indian Rupee (INR), since 1947, displayed a depreciating trend till 2003, later it appreciated till 2007. Beginning 2008, INR has shown more volatility, coupled with a depreciating trend (see Figure 1). Theory in international finance establishes that both domestic firms and firms with foreign currency transactions are susceptible to currency risk. Empirical literature estimates currency exposure1 of firms using equity returns as a proxy, and highlights a “currency exposure puzzle".2