A Study of Foreign Exchange Exposure in the Indian IT Sector

Abstract

Foreign exchange exposure measures the extent of fluctuation of a firm’s future cash flows with respect to exchange rate movements. In particular, such fluctuation can have an adverse impact on firms which are already under tight liquidity constraints, often leading to financial distress. Thus, firms must evaluate their foreign exchange exposure in order to effectively hedge their foreign exchange risk. This study examines the issue of foreign exchange rate exposure in the Indian information technology (IT) sector. Foreign exchange exposure is particularly important for firms in the Indian IT sector, as a major part of their revenue is derived from exports. Dash and Madhava (2009) found positive foreign exchange exposure for the sector in the period 2005-07, and alarmingly high level of exposure for some small-cap IT companies. Since then, in the aftermath of the global financial crisis, the nature of the IT sector has dramatically changed, with lower dependence on the US market in particular. The present study assesses whether there is still significant positive foreign exchange exposure in the Indian IT sector, and whether there is still a significant difference in foreign exchange exposure