A Re-examination of Exchange Rate Exposure: Industry-level Analysis of Indian Firms

Abstract

This study examines the relationship between exchange rate changes and firm value. For this purpose, a sample of 342 Indian non-financial firms grouped into 20 industry portfolios is studied over the period of April 2006 to March 2011. The sensitivity of industry’s stock returns to actual and unanticipated changes in exchange rate is determined. The study reports a higher number of industries significantly exposed to real exchange rate changes than nominal changes which implies that the firms should focus more on their real currency exposure especially in the emerging markets experiencing high inflation. The results also suggest that the Indian industries gain (loss) from the depreciation (appreciation) of the rupee against foreign currencies. The results are robust to the use of bilateral exchange rate and estimation models. The findings have practical and theoretical implications.