Foreign Currency Borrowing of Corporations as Carry Trades: Evidence from India / Viral V. Acharya, Siddharth Vij.

Format:

Book

Author/Creator:

Acharya, Viral V.

Contributor:

National Bureau of Economic Research.

Vij, Siddharth.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28096.

NBER working paper series no. w28096

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

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.

Notes:

Print version record

November 2020.