Empirical Analysis of the Forex Exposure of Indian Industries

Abstract

Foreign exchange exposure is the measure of the sensitivity of a company’s cash flows to the variations in the exchange rates. This paper uses a model Where FOREX exposure of Indian industries is estimated from empirical analysis using three variables: Industry return, nifty index return and INR-Foreign Currency returns. The FX exposure is estimated from a sample of 1594 Indian firms listed on National Stock Exchange of India (NSE) grouped into 112 different industries. The data represents the time period of rupee appreciation and depreciation from the FY2002 upto FY2013. The study finds that several Indian industries have significant FX exposure with the Computer industry having the highest and Telecommunication sector having the least total absolute exposure for 10 year period (FY 2002-03 to FY2012-13). During the period of rising rupee (FY2002-03 to FY2007-08), Indian companies had maximum exposure to Euro and Computer sector had the highest exposure an1ong all industries. However, during the falling rupee era (FY2008-09 to FY2012-'13), Indian companies had highest exposure to US Dollar with Computer Sector again leading all other industries. This is so because Indian industries have been able to balance their revenues and costs thereby reducing the net exposure. Other reason is that the Indian industries have been hedging their FX risks using derivative products such as IR swaps, Futures. Forwards & Options. The finding of this paper can also be verified by estimating the FX exposure of these industries from their revenues, expenses and profits expressed in foreign currency or the average asset size & turnover, B/M ratio and financial leverage. The findings of this study will be useful for industry associations and company managers/policy makers for formulating hedging policies and accounting standards. The study findings will also help the banks to identify sectors with high FX risks and target firms within those sectors for using the derivative products.