Asymmetric exchange rate exposure and its determinants: Analysis of the emerging market firms

The wave of globalization has increased international trade and business to many folds. Countries moving toward capital account convertibility have enabled investors to invest in any part of the world. Consequently, financial integration has led to volatility in the currency and capital market. The variation in the exchange rate leads to fluctuation in stock return. However, the response of firms to currency fluctuation may vary for periods of appreciation and depreciation. The daily return of 260 firms was analyzed from 2004 to 2019. The study uses the orthogonalized model developed by Di Iorio and Faff (2000) and Koutmos and Martin (2003). The result shows that 66.54% of firms were affected by currency fluctuations and 12.2% of firms responded asymmetrically to periods of appreciation and depreciation. The analysis revealed that service sector firms are more exposed to currency fluctuation than the manufacturing sector. The study also explores a comprehensive range of determinants of exchange rate exposure. The research revealed that size and quick ratio are inversely related while asset turnover, foreign sales, and book-to-market value have a positive relationship with exchange rate exposure. The research will act as a guiding force to the policymakers to make an efficient exchange rate policy while portfolio managers can use the findings of the study in forming hedging strategies

An Analysis of Macroeconomic Factors Affecting Foreign Exchange Rate

The Indian Rupee is launching its foot print in global market, which can be characterized by the fact that Bhutan and Nepal peg their currencies to Indian Rupee. The Indian economy contributes a higher GDP growth compared to other emerging economies. The increase in the GDP, aids well for a strong foreign exchange along with other economic factors such as gross domestic savings, forex reserve, inflation and so on. The various initiatives taken by the government recently to attract more foreign capital through various investment schemes and reduce interest rate as well assists to achieve a stabilized exchange rate in India. The RBI is focused for capital account convertibility, with various measures to achieve a freely floating currency from the present managed float in India. In view of recent appreciation of Chinese Yuan, it became tough for policy makers to take up an immediate action in supporting the home-grown industries. In this context, the research focuses to find and evaluate the various macroeconomic factors affecting the exchange rate and to model the factors using Auto Regressive Distributive Lag, to enable to forecast the exchange rate. The research focuses on finding the significant factors influencing the volatility of the exchange rate.

Renminbi internationalisation will push ahead

Subject Renminbi internationalisation. Significance The renminbi emerged from relative international obscurity to become the fifth most-used currency in international payments in just over a decade. Nevertheless, its international use as a currency of settlement or foreign exchange reserves remains small compared to the dollar and euro. Without full capital account convertibility, the benefits of its international usage have been restricted to exporters and offshore settlement centres, especially Hong Kong. Impacts Reform will raise renminbi quotas for portfolio investors, boost outward direct investment and develop China's international payment system. Incremental reforms will help rebalance China's net international investment position. In the longer term, internationalisation will benefit domestic bond and equity markets by increasing their depth and liquidity.

Fed hike may slow India's move to full convertibility

Subject Capital account convertibility. Significance The debate on whether India should render the rupee fully convertible, including on the capital account, has returned following a passing statement recently by Reserve Bank of India (RBI) Governor Raghuram Rajan that India hopes soon to achieve full capital account convertibility. Many factors are encouraging this transition, especially India's comfortable foreign exchange (forex) reserves and large capital inflows. Impacts With China seeking gradually to internationalise the renminbi, Indian authorities may not want to be left behind. Unfettered overseas corporate borrowing has exposed these borrowers to currency depreciation. The IMF is unlikely to advocate removal of all capital controls.

Evolution of India’s Foreign Exchange Market

India’s foreign exchange policy after Independence has evolved in tandem with international developments and domestic requirements. The post-reforms period has been marked by wide-ranging measures to widen and deepen the market, besides exchange rate liberalisation. The momentous developments over the past few years are reflected in the enhanced risk-bearing capacity of banks along with rising foreign exchange trading volumes and finer margins. The foreign exchange market has acquired depth. With the economy moving towards fuller capital account convertibility in a calibrated manner, focused regulation and monitoring of the foreign exchange market assumes added importance. In this context, there is a need to strengthen infrastructure, transparency and disclosure, and product range in the foreign exchange derivative markets.

Capital Account Convertibility: An Indian Perspective

Capital Account Convertibility is defined as the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. Capital Account Convertibility is widely regarded as one of the signs of a developed economy. The impact of ongoing recession on India has been less due to the partial convertibility of rupee. The objective of the paper is to examine the present status of Capital Account Convertibility in India and to examine the approach which India has followed for full Capital Account Convertibility. It also analyses the economic indicators for India in the present situation and the challenges which Indian economy faces for full Capital Account Convertibility. The paper concludes that there is a need to wait and watch as the economy of India is not stable enough to withstand all external pressures.

Is there any Long-run Relationship between India’s Current and Capital Account Balance? A Time Series Analysis

The long-run relationship between current account balance (CAB) and capital account balance (KAB) and the repercussions of capital account convertibility (KAC) on the growth process of a country is a much-debated issue. In particular, in the aftermath of the Southeast Asian crisis, the limitation of the liberal capital regime for a developing country like India is often highlighted in the literature. However, the probable impact of introducing KAC on CAB in India is generally discussed theoretically. Though some empirical studies in India have recently focused on this research question, the current paper contributes to the literature first, by exploring the presence of any endogenous structural breaks in the individual series of CAB and KAB and then examining the nature of long-run relationship between them. Applying the ARDL method of co-integration, the empirical findings support the presence of a long term co-integrating relationship between capital and current account balance and reveals that a significant structural break is observed during 2002–03 for both the series.