Why do Indian Firms Borrow in Foreign Currency?

Abstract

We investigate why firms in emerging economies such as India borrow in foreign currency. The results of a dynamic panel regression approach suggest that both firm-specific factors and macroeconomic factors are significant in explaining the corporate sector dollarization. Export revenue and tangible assets are primary drivers of the external commercial borrowings (ECBs) of non-financial firms, whereas the ECBs of financial firms are sensitive to interest rates in global markets. The policy measures to relax restrictions on firm borrowing in foreign currency facilitate the denomination of corporate debt in foreign currency, but such exposure was adversely affected by the global financial crisis. The findings of the study suggest the vital need to develop the domestic bond market to reduce firms’ dependency on external finance. The results also call for competitive interest rates in the domestic fixed income segment through monetary policy intervention. JEL Classification: G300, G320, F310