Foreign Currency Borrowing and Risk Exposure of Firms: An Emerging Market Economy Viewpoint

Abstract

Foreign currency borrowings by emerging market corporations have increased significantly in the post-global financial crisis. Extant literature has mainly focused on the cause of the increase in foreign currency borrowings. In this paper, we study the consequences of the increase in foreign currency borrowings. We examine the role that foreign currency borrowings play in transmitting the risks associated with changes in global credit market conditions and currency mismatch risk to the domestic firms. We use the data of non-financial Indian firms listed in the Bombay Stock Exchange and National Stock Exchange to do our analysis. We find that foreign currency borrowings increase the risk exposure of the firms. Furthermore, foreign currency borrowings play a crucial role in transmitting global credit liquidity risk and currency risk to domestic firms. Overall, our results indicate that too much foreign currency borrowings may pile risk in the financial system that may become a cause of concern.