Exchange rate sensitivity: Indian perspective

Abstract

This paper aims to find the exchange rate sensitivities of Indian firms, through a regression analysis of the stock returns of selected companies against the changes in exchange rate of Indian rupee against the dollar, and the movement of the market portfolio returns, to account for other macroeconomic changes which affect all companies. A representative sample of Indian companies, spanning several industries and forming a part of the BSE 500 index, has been used for the analysis. An aggregate level regression spanning all representative industries showed that Indian companies’ returns are indeed sensitive to exchange rate fluctuations at a significant level, and the relation was negative, meaning that the returns decreased with depreciation of the INR. This result may be used to conclude that Indian companies are net importers on an aggregate level. On further disaggregating the data to carry out industry-level and firm-level analyses, it was found that the sensitivity was increases by capital-intensive industries like Metals & Mining, while hedging had been used to do away with much of the exposure by industries like Oil & Gas, and Automotive industries. It was also found from the study that the exposure to exchange fluctuations increased with firm size.