Impact of exchange rate fluctuation on profitability- An Empirical study of a select sample of firms

ABSTRACT

Foreign trade presentation estimates the degree of variance of a company’s future money streams as for conversion standard developments. Specifically, such change can have adverse effect on firms which are as of now under tight liquidity imperatives, frequently prompting money related pain. In this way, firms must assess their remote trade introduction so as to viably fence their outside trade chance. This examination inspects the issue of outside conversion scale introduction in the Indian data innovation (IT) area. Remote trade introduction is especially significant for firms in the Indian IT division, as a noteworthy piece of their income is gotten from fares. Dash and Madhava (2009) discovered positive outside trade presentation for the part in the period 2005-07, and alarmingly abnormal state of introduction for some little top IT organizations.

From that point forward, in the outcome of the worldwide budgetary emergency, the nature of the IT division has significantly changed, with lower reliance on the US showcase specifically. The present examination surveys whether there is as yet noteworthy positive remote trade introduction in the Indian IT part, and whether there is as yet a huge contrast in outside trade presentation between enormous top, medium cap, and little top IT firms. The investigation depended on an example of thirty Indian IT firms for the period 2009-12. The remote trade introduction of the example firms was figured utilizing the Bodnar-Marston (2002) equation.

The theories were tried utilizing t-tests and sham variable relapse. The consequences of the examination demonstrate huge positive outside trade presentation in the Indian IT part, and diminishing remote trade introduction crosswise over enormous top, medium-top, and little top IT firms, as per operational scale. The outcomes likewise demonstrate a negative effect of outside trade presentation on benefit, with positive effect for enormous top IT firms. Accordingly, descending developments in the swapping scale would profit little and mid-top IT firms yet would unfavourably influence enormous top firms, and the other way around for upward developments.

Keywords: foreign exchange exposure, foreign exchange risk, Indian IT sector.

Research Questions

1) The Indian economy is going through a period of transition in the light of liberalization adopted by the government of India. This is observed in terms of the continuous inflow of funds for investment in India from abroad and its deep impact on the exchange rate of Indian currency in international market.

2) There has been a significant increase in the number of Indian business enterprises exporting their products and services. This increase is observed not only in terms of the variety of products and services but also volume, value and increased inflow of earnings in foreign exchange.

3) Unlike in the past, Indian enterprises are now directly entering the foreign capital markets to raise their investment requirements.

4) The generally observed continuous and uncertain downward slide of the parity value of Indian rupee is now being replaced by a gradual, uncertain upward swing of the Indian rupee in relation to currencies of developed economies.

5) The excessive usage of USD (which by itself is faced with high degree of volatility in the international currency market) for overseas operations by Indian enterprises and the excessive volatility of Indian rupee against USD has been resulting in a high degree of currency exposure for Indian business enterprises.

Objectives

The basic objective of the study is to understand and evaluate the management of currency exposure as practiced by Indian business enterprises of different categories engaged in multinational business. The above primary objective can be sub divided into the following specific objectives: –

1. To ascertain the degree of currency exposure faced by the Indian business enterprises and study the seriousness with which they view the problem of currency exposure.

2. To study the techniques used by different categories of business enterprises to address the problem of currency exposure.

3. To evaluate the role of the government in application of regulatory and supportive measures with reference to currency exposure management by Indian business enterprises.

4. To offer suggestions that may help the business enterprises in managing their currency exposure.

Research Methodology

The present empirical study is undertaken with an objective of understanding and evaluating the management of currency exposure as practiced by Indian enterprises of different categories engaged in multinational business. The various facets of research methodology are given below.

· Data:

The present study deals with the currency exposure management of Indian business enterprises. The study is mainly based on primary data. The required primary data was collected using well-structured and pre-tested questionnaire administered to business enterprises situated in different parts of India. The questionnaire was administered through several channels, which included surface mail, e-mail and personal participation. Secondary data was collected through the extensive review of books, articles, reports, newspapers, portals etc.

· Sample:

The survey was conducted with the pre-tested questionnaire administered on 90 business enterprises in India having foreign currency exposure. Stratified random sampling method was used for selecting the business enterprises for the study. Stratification was done based on the Industry sector the respondent enterprise belongs to. The respondent enterprises were thus classified as IT (information technology) sector respondents, Pharmaceutical sector respondents and rest of the respondents were categorised as ‘Other sector’.

· Analytical tools:

Apart from conducting pilot test, reliability analysis recommended by Cronbach (1951) was also applied to test the internal consistency of the instrument. The analysis showed that the Alpha-Cronbach coefficients were in the range of 0.73 to 0.85. According to Nunnally (1978), reliability co-efficient of 0.7 and above is considered adequate. Accordingly, the research instrument used in the study was internally consistent and reliable. In analysing the responses of the respondent enterprises, the Microsoft Excel Spreadsheet and SPSS software have been used. Certain tested and tried Statistical tools such as percentages, averages, frequencies have been used. Apart from these basic tools, T test and F test (ANOVA) were applied to test the hypothesis.

Literature Review

Foreign alternate exposure measures the extent of fluctuation of a firm’s future cash flows with admire to exchange price actions. Foreign alternate exposure is a large risk thing for firms engaged in worldwide commercial enterprise. Jorion (1990) has found that the volatility of change costs is significantly higher than that of hobby prices or of inflation. However, as it is tough to immediately degree destiny coins flows, researchers have normally tested foreign exchange exposure via examining how the company’s market cost responds to adjustments in alternate fees. Several researches have empirically addressed the difficulty of foreign exchange price publicity, especially for U.S. Companies. The research usually said negligibly low ranges of foreign exchange exposure for most companies, even for companies with enormous overseas operations.

Jorion (1990) proposed a regression methodology for measuring trade price exposure at firm level, taking stock returns because the established variable, and price of trade of weighted alternate rate and marketplace returns because the impartial variables. He located very weak support for change price publicity, but sizeable cross-sectional differences within the exposure of U.S. Multinationals. On the opposite hand, Bodnar and Gentry (1993) examined industry-degree exposures in U.S., Canada, and Japan, and discovered enormous publicity for a few industries in all 3 countries. Choi and Prasad (1995) examined the trade chance sensitivity of U.S. Multinational firms in the duration 1978-89 and suggested that exchange charge fluctuations affected company value.

They also found that differences in exchange threat sensitivity have been related to company-particular variables inclusive of income and belongings. Bodnar and Marston (2002) advanced a version of foreign exchange exposure dependent on only three variables – the proportion of the company’s sales and expenses denominated in foreign foreign money and its income charge. They cautioned that the low tiers of exposure observed by preceding empirical studies can be because of operational hedges, wherein multinational companies fit their foreign forex revenues and prices. Salifu et al (2007) analysed the forex risk exposure of the firms listed in Ghana with respect to Cedi to USD, GBP, Euro, and a weighted trade fee index. They located that forex exposure changed into highest against USD (55%), accompanied by means of GBP (35%), and Euro (10%). El-Masry et al (2007) studied the foreign exchange publicity of non-monetary UK firms with recognize to their size and overseas operations. They discovered proof of great foreign exchange exposure, with better effect on larger corporations as compared to small and medium corporations, and better effect on firms with better foreign exchange sales.

Hyde (2007) analysed the reaction of inventory returns at the enterprise stage to market, interest charge, and change fee threat in France, Germany, Italy and United Kingdom, and found substantial stage of threat publicity in all primary four economies, however with one of a kind beta coefficients in distinctive international locations. Dash and Madhava (2009) analysed the forex exposure of the Indian IT area in the period 2005-07. They observed that foreign exchange exposure was alarmingly excessive for a small fraction of small-cap IT firms, whilst the mid-cap and massive-cap IT corporations had especially low/mild exposure levels, with the general public of big-cap IT corporations having already hedged their forex chance. Dhasmana (2013) studied the factors affecting trade fee exposure and the consequences of alternate fee publicity for Indian corporations over the period 1995-2011 the use of the Bodnar-Marston (2002) model.

He found that change price volatility has a substantial impact on forex exposure, apart from company-specific elements consisting of company length and boom. On the alternative hand, he observed that foreign exchange exposure had huge impact on output growth, income in step with percentage, and capital expenditures of the companies, possibly moderated by means of the nature of the alternate fee regime. The literature on foreign exchange publicity could be very diffuse and number one centred on U.S. Corporations.

Further, the findings on foreign exchange exposure appear to vary with enterprise and with country. Foreign exchange publicity is specifically critical for companies inside the Indian IT region, as a prime part of their revenue is derived from exports. Dash and Madhava (2009) had discovered positive foreign exchange publicity for the sector inside the period 2005-07, and alarmingly high degree of exposure for a few small-cap IT groups. Since then, within the aftermath of the global monetary crisis, the character of the IT zone has dramatically changed, with decrease dependence on the US market specifically. The present study addresses the issue of foreign exchange exposure within the Indian IT sector and its effect at the profitability across large-cap, medium-cap, and small-cap IT firms.

Author details: NANDINI TRIPATHY (SYMBIOSIS LAW SCHOOL, HYDERABAD)

The views of the author are personal only.