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

65 Pages Posted: 11 Nov 2020 Last revised: 30 Aug 2021

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - 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: July 21, 2021

Abstract

We establish that macroprudential controls limiting capital flows can curb risks arising from foreign currency borrowing by corporates in emerging markets. Firm-level data show that Indian firms issue more foreign currency debt when the interest rate differential between India and the United States is higher. This "carry trade" relationship breaks down once regulators institute more stringent interest rate caps on borrowing; riskier borrowers cut issuance the most. Stock price exposure of issuers to currency risk rises after issuance, a source of vulnerability during the "taper tantrum" episode of 2013, which macroprudential controls subsequently nullified, as confirmed during the COVID-19 outbreak.

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

JEL Classification: F31, F34, G15, G30

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Vij, Siddharth, Foreign Currency Borrowing of Corporations as Carry Trades: Evidence from India (July 21, 2021). Available at SSRN: https://ssrn.com/abstract=3727686 or http://dx.doi.org/10.2139/ssrn.3727686

Viral V. Acharya

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

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New York University (NYU) - Department of Finance ( email )

Stern School of Business
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Centre for Economic Policy Research (CEPR) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Siddharth Vij (Contact Author)

University of Georgia Terry College of Business ( email )

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United States

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