Transmission of real exchange rate changes to the manufacturing sector: the role of financial access

Abstract

We explore the impact of real exchange rate changes on the performance of Indian manufacturing firms over the period 2000–2012. Our empirical analysis shows that real exchange rate movements have a significant impact on Indian firms’ performance but the impact varies across different firm and industry characteristics. In particular, the impact depends upon the degree of market power, trade orientation, foreign ownership, access to domestic finance and industry concentration. Furthermore, appreciation and depreciation affect firms’ performance differently. Results from Panel-VAR confirm these findings. Overall, our results point toward the need for taking into account firm and industry level heterogeneity in designing policies aimed at managing exchange rate shocks and also the role of greater financial development in currency risk management.