Foreign Currency Borrowing of Corporations as Carry Trades: Evidence from India

61 Pages Posted: 11 Nov 2020

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Siddharth Vij

University of Georgia Terry College of Business

Multiple version iconThere are 3 versions of this paper

Date Written: November 10, 2020

Abstract

We establish that macroprudential policies limiting capital flows can curb risks arising from corporate foreign currency borrowing in emerging markets. Using detailed firm-level data from India, we show that propensity to issue foreign currency debt for the same firm is higher when the difference in short-term interest rates between India and the US is higher, i.e., when the dollar `carry trade' is more profitable; this behavior is driven by the period after the global financial crisis. The positive relationship between issuance and the `carry trade' breaks down once regulators institute more stringent interest-rate caps on foreign currency borrowing. Riskier borrowers such as importers and those with higher interest costs cut issuance most. Firm equity exposure to foreign exchange risk rose after issuance in favorable funding conditions and emerged as a source of external sector vulnerability during the `taper tantrum’ of 2013. Macroprudential policy action limiting capital flows is able to nullify this effect, such as during the market stress due to the COVID-19 pandemic.

Keywords: emerging markets, foreign currency debt, foreign exchange risk, taper tantrum

JEL Classification: F31, F34, G15, G30

Suggested Citation

Acharya, Viral V. and Vij, Siddharth, Foreign Currency Borrowing of Corporations as Carry Trades: Evidence from India (November 10, 2020). Available at SSRN: https://ssrn.com/abstract=3727686 or http://dx.doi.org/10.2139/ssrn.3727686

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Siddharth Vij (Contact Author)

University of Georgia Terry College of Business ( email )

620 S. Lumpkin Street
Amos Hall, B324
Athens, GA 30602
United States

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