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Exchange Rate Exposure and its Determinants:

Evidence from Indian Firms

Sonali Madhusmita Mohapatra & Badri Narayan Rath

To cite this article: Sonali Madhusmita Mohapatra & Badri Narayan Rath (2017) Exchange Rate
Exposure and its Determinants: Evidence from Indian Firms, The International Trade Journal, 31:2,
197-211, DOI: 10.1080/08853908.2016.1211040

To link to this article: https://doi.org/10.1080/08853908.2016.1211040

Published online: 05 Aug 2016.

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THE INTERNATIONAL TRADE JOURNAL
2017, VOL. 31, NO. 2, 197–211
http://dx.doi.org/10.1080/08853908.2016.1211040

Exchange Rate Exposure and its Determinants: Evidence

from Indian Firms
Sonali Madhusmita Mohapatra and Badri Narayan Rath
Department of Liberal Arts, IIT Hyderabad, Hyderabad, India

ABSTRACT KEYWORDS
This article examines the determinants of the exchange rate Debt ratio; exchange rate
exposure; market to book;
exposure by comparing both manufacturing and service sector panel data; size
firms in India over the period of 2000 to 2013. First, the study
finds that service sector firms are more exposed to exchange
rate changes than manufacturing firms in India. Second, the
results indicate that the market-to-book ratio and export are
significant and positively related; however, size is negatively
related to the exchange rate exposure of both the manufactur-
ing and service sector firms. These results are robust with the
estimation using a trade-weighted exchange rate.

I. Introduction
Measuring exchange rate exposure of firms and industries has been a subject of
research interest over the last two decades. Exchange rate movements have
been the major factor of international economic activity, particularly after
globalization. Exchange rate fluctuations or movements affect a country’s
economic activity. When a country’s currency changes (appreciates or depreci-
ates) against the currency of other countries, it influences the external sector
and thereby affects both export- and import-oriented firms in the country. For
instance, a country’s domestic currency appreciation is a loss for its export-
oriented firms, whereas it stands as a profit for import-oriented firms. There
are various channels through which firms can be exposed to the exchange rate
risk. If a firm with foreign sales is exposed to the exchange rate risk, the value of
the foreign sales in terms of the domestic currency changes with exchange rate
changes. However, exchange rate exposure is not limited to exporters, impor-
ters, or multinational firms. Even a domestic firm with no foreign activities is
exposed to exchange rate risk through import competition.
Many theoretical (Adler and Dumas 1980; Heckerman 1972; Hodder 1982;
Shapiro 1975) and empirical studies (Adler and Dumas 1984; Bartov and Bodnar
1994; Choi and Prasad 1995; He and Ng 1998; Jorion 1990) have measured

CONTACT Sonali Madhusmita Mohapatra sonalieco@gmail.com Department of Liberal Arts, IIT

Hyderabad, Hyderabad, India.
Color versions of one or more of the figures in the article can be found online at www.tandfonline.com/uitj.
© 2017 Taylor & Francis Group, LLC
198 S. M. MOHAPATRA AND B. N. RATH

exchange rate exposure and its determinants. According to Dumas (1978) and
Adler and Dumas (1980), exposure represents the sensitivity of a firm value to
exchange rate changes, and it is measured by the coefficient of firm value when
the exchange rate changes. Jorion (1990) reported a statistically insignificant
relationship between exchange rate changes and firm value in U.S. multina-
tionals. He also found that foreign sales were insignificantly exposed to exchange
rate changes in U.S. multinationals, whereas Choi and Prasad (1995) reported
that there is significant exchange rate exposure in U.S. firms. They also found
that foreign sales are an important factor in determining the exchange rate
exposure, and a positive relation exists between them. On the other hand, He
and Ng (1998) found that only 25% of 171 Japanese multinationals have been
exposed to exchange rate changes. They also reported that both foreign sales and
firm size are positively related to the exposure of Japanese multinationals.
However, Allayannis and Ofek (2001) found that size is an important factor in
determining exchange rate exposure. The work of Allayannis and Ihrig (2001)
found that export and import are important factors in determining exchange
rate exposure, and Williamson (2001) asserts that competition is a major factor
in determining the exchange rate exposure of U.S. and Japanese automotive
industries. Aggarwal and Harper (2010) also examined the determinant of
exchange rate exposure of U.S. domestic firms, and their study found that size
is negatively related and market-to-book ratio and debt are positively related to
the exchange rate exposure. Kanagaraj and Sikarwar (2011) studied the exposure
of Indian firms by using a trade-weighted exchange rate. Their study found that
only 16% of the firms are exposed to exchange rate changes and export ratio is
positively related to exchange rate exposure while hedging ratio is negatively
related. Most of the studies included firm size, being multinational, and inter-
national activity as the factors to determine the exchange rate exposure. A
limited number of studies addressed the determinants of exchange rate exposure
at the firm and industry levels in developing countries.
However, we find that there are no studies except that of Kanagaraj and
Sikarwar (2011) which discuss exchange rate exposure and its determinants
in India. Our study differs from that of Kanagaraj and Sikarwar (2011) in
two ways. First, we estimate the exchange rate exposure for both manufac-
turing and service sectors firms in order to find which sector is more likely
to be exposed to exchange rate changes. Second, we explore whether the
determinants of exchange rate exposure are common in India, irrespective
of the sectors. In India, both the manufacturing and service sectors are
greatly exposed to the foreign exchange market, particularly after the 1991
reforms, and both sectors contribute a major share to the GDP. The service
sector accounts for around 60% of the country’s GDP, 20% of total trade,
40% of exports, and 20% of imports, and has emerged as one of the largest
and fastest growing sectors (DGCI 2013). Both the manufacturing and
service sector play a crucial role in economic development. To our
 THE INTERNATIONAL TRADE JOURNAL 199

knowledge, none of the studies have focused on the exchange rate exposure
of both manufacturing and service sector firms. Thus, one can say that
exposure varies between the manufacturing-based vis-à-vis service-based
firms because both sectors operate differently while dealing with export and
import activities. Exchange rate exposure immediately and significantly
affects monetary assets. Therefore, it is imperative to identify the key
determinants for which the firms acquire more monetary assets and avoid
exposure to exchange rate changes. The overall structure of our article is
mostly based on earlier articles from authors such as Hutson and Stevenson
(2010), Hutson and O’Driscoll (2010), and Akay and Cifter (2014).
However, we examine the determinants of exchange rate exposure by
using Indian firm level data and comparing the results between the man-
ufacturing and service sectors. Our findings show that service sector firms
are more exposed to exchange rate changes than manufacturing firms in
India. The results also indicate that market-to-book ratio, exports, and firm
size are the key determinants of exchange rate exposure for both manufac-
turing and service sectors in India.
The remainder of the article is organized as follows. Section 2 contains the
data description and methodology. The empirical results are elucidated in
Section 3. Robustness checks are presented in Section 4, and Section 5
concludes the article.

II. Data and methodology

Data
The present study uses monthly as well as annual data of manufacturing- and
service-based firms in India during the period of 2000 to 2013. The firm level
data are obtained from CMIE (Centre for Monitoring Industries) PROWESS.
The PROWESS database provides data on financial and economic indicators
for 16,000 firms that are registered companies. This study selects 232 firms
from both sectors (156 from the manufacturing sector and 76 from the service
sector) based on the availability of data on consistency from 2000 to 2013 for
all of the variables used in this article. We then measure the exchange rate
exposure for each firm.1 The monthly data of these variables, such as stock
prices and the CNX500 Index, are collected from the PROWESS database.
Bilateral exchange rates (USD) and trade-weighted exchange rate (NEER) are
retrieved from RBI Bulletin.2 Most of the studies use a currency basket to
1
The industries selected for the manufacturing sector are petroleum (for both export and import), gems and
jewelry, machinery (except electrical and electronics, electronics goods, and machinery instruments). The
industries selected for the service sector are communication, IT, transport services for export and import,
hotel, and wholesale and retail.
2
USD is the Indian currency against the U.S. dollar and NEER is the 36 countries’ Nominal Effective Exchange Rate
Index.
200 S. M. MOHAPATRA AND B. N. RATH

measure exchange rate exposure, which gives the same sign and size of
exposure on a firm, irrespective of any currency.3 A firm can export with
one currency and import with another currency. The sign and size of the
exposure can be different and depend on the particular currency’s movement.
Following Aggarwal and Harper (2010) and Priestley and Odegaard (2007), we
use bilateral exchange rate between the Indian rupee and the U.S. dollar
because the U.S. dollar is considered to be the major trading currency in
India. Further, data on India’s major trading partners in Appendix 1 also
justify our logic for choosing the bilateral exchange rate for measuring the
exchange rate exposure. Finally, we also supplement this analysis by using
NEER based on 36 currencies as the measurement for exchange rate exposure.
For examining determinants of exchange rate exposure, the yearly data of
all firm-specific factors, such as size, debt ratio, export to sales, market-to-
book ratio, and asset turnover are collected from PROWESS database.
Following Jorion (1990), Choi and Prasad (1995), He and Ng (1998),
Aggarwal and Harper (2010), and Akay and Cifter (2014), we identify that
factors such as size, debt ratio, export to sales, market-to-book ratio, and
asset turnover are included as the key determinants for the exchange rate
exposure. The descriptions of the variables are as follows: debt is defined as
the ratio of firm’s total debt to total asset, which is used as the proxy of firm’s
financial strength. Asset turnover is measured by ratio of sales to total asset
and is used as the proxy for firm’s operational strength, while market-to-
book ratio is used as the proxy of a firm’s growth opportunities.
The definition and sources of all the variables used in this article are
explained in Table 1.

Methodology
Our examination of determinants of exchange rate exposure follows a two-
stage process. In the first stage, we estimate both firm- and industry-level

Table 1. Definition and source of variables.

Variables Definition Sources
Rit firms’ stock returns PROWESS
Rmit market returns (CNX 500) PROWESS
USD difference of U.S. dollar exchange rates RBI Bulletin
NEER difference of trade-weighted exchange rates RBI Bulletin
Exposure coefficient estimated exposure coefficient Author’s calculation
Asset turnover firms’ sales to total asset ratio PROWESS
Debt firms’ debt to total asset ratio PROWESS
Export firms’ export to total sales PROWESS
Market to book firms’ market-to-book ratio PROWESS
Size log of firms’market value PROWESS

3
Currency basket or trade-weighted exchange rate.
 THE INTERNATIONAL TRADE JOURNAL 201

exchange rate exposure by using a bilateral exchange rate (USD). For each
firm, exposure coefficients are calculated. Following Adler and Dumas (1984)
and Jorion (1990), the exchange rate exposure is measured using a two-factor
asset pricing model.4
The model is as follows:
Rt ¼ β0 þ β1 RMt þ β2 FXt þ εt (1)

where Rt denotes the return on firm at time t, RMt is the return of CNX500
index at time t, and it gives the residual market portfolio return measures,
FXt is the exchange rate (US Dollar and NEER) at period t, and εt is the error
term with i.i.d (0, σ2). β1 denotes a firm’s market beta or sensitivity of stock
returns to market movements, and the coefficient of β2 measures the
exchange rate exposure of firm or sensitivity of stock returns to exchange
rate movements. Using both market portfolio and exchange rate as factors in
a model raise the possibility of factor correlations between these two vari-
ables. To avoid any bias, the residual market factor is used in this model,
which is orthogonal to the exchange rate factor formed by regressing the
exchange rate on market factor.
In the second stage, we examine the determinants of exchange rate expo-
sure using a panel data model. The Hausman’s specification has been used to
choose between the fixed and random effect models. The estimated exchange
rate exposure coefficient (beta coefficient) is used as the dependent variable
and firm-specific factors as independent variables with the following
equation:
qffiffiffiffiffiffiffi
jβit j ¼ β0i þ β1i DTit þ β2i ERit þ β2i MTBit þ β2i Sizeit þ β2i Turnit þ εit (2)
pffiffiffiffiffiffiffi
where jβit j is the square root absolute value of exchange rate exposure
calculated using Equation (1). To be more specific, we first measure the
exchange rate exposure for each of the 232 firms by running a simple OLS
regression. Then, we consider only those firms whose exposure coefficients
are statistically significant. In this stage, we notice that some of the coeffi-
cients are positive and some are negative, but both types of coefficients are
statistically significant. Thus, we treat those values (in modulus form) as the
measure of exposure. DT is the average debt ratio, ER is the average export
ratio, MTB is the average market-to-book ratio, Size is the log of average
market value of the industries, and Turn is the average asset turnover. Using
the square root of absolute value reduces transaction bias and non-normal
error terms (Hutson and O’Driscoll 2010).
We expect positive relation between debt and exchange rate exposure
because the firms with higher debt can be more affected by financial risk.
4
This estimation follows the OLS approach.
202 S. M. MOHAPATRA AND B. N. RATH

Similarly, market-to-book ratio, the proxy of growth opportunities, can be

expected to exhibit a positive relation because a firm grows when its foreign
activities increase. As a result, it is more exposed to the exchange rate. A firm
with higher asset turnover protects itself from economic and financial
changes, so a negative relation is expected. Generally, it is seen that the
larger firms are less likely to be affected by exchange rate exposure because
of their greater ability to diversify the risk caused by exchange rate exposure
through involvement in hedging activities (Allayannis and Ofek 2001).
Therefore, we believe a positive relation exists between size and exchange
rate exposure. Similarly, export may positively relate to exchange rate
exposure.
Since our aim is to examine the exchange rate exposure and the factors
which determine the exchange rate exposure of the firms, we consider both
significantly exposed firms and full sample firms for estimation purposes. By
using Equation (1), we find that 149 firms are significantly exposed to the
USD exchange rate. In order to increase the number of observations for the
longer horizon, we use non-overlapping time periods. We divide this 14-year
time period into three parts: January 2000 to December 2004, January 2005
to December 2009, and January 2010 to December 2013 for 232 firms. Then,
we run a simple OLS regression for all three sub-periods for each individual
firm in our sample. By doing the exercise, we obtain three betas for a single
firm. Next, we make a panel with T = 3 and N = 232. Similarly, for all of the
explanatory variables, we take the average values for each of the three non-
overlapping periods. Therefore, we finally ended up with 696 observations
(NT observations).

III. Empirical results

Before discussing the results of the determinants of exchange rate exposure,
we first illustrate the results of the descriptive statistics and correlation
matrix in Table 2 and Table 3, respectively. Table 2 shows the mean, median,
and standard deviation of the variables used in the article. Similarly, the
correlation matrix shows that the variables are not correlated to each other
and hence no multicollinearity exists among the explanatory variables.
Examining the stationary property of a time-series data is crucial before
running any econometric models. In this study, we use the panel unit root
tests of Breitung (2000) and Harris and Tzavalis (1999). The results are
presented in Table 4, and those results are based on drift only, without any
time trend. We did not consider the trend because of small t (t = 3, five years
non-overlapping average). The main findings from the unit root test are that
all variables are panel stationary at that level.
 THE INTERNATIONAL TRADE JOURNAL 203

Table 2. Descriptive statistics of determinant factors.

Variable Median Mean Std. dev. Minimum Maximum
Debt 0.211 0.260 0.352 0.000 6.410
Asset Turnover 0.924 1.058 0.759 0.013 7.751
Size 2363.075 61052.08 283752.3 36.74 29,92,147
Market to book 1.012 2.821 6.154 0.016 40
Export 0.119 0.271 0.317 0.000 1
Note. This table contains descriptive statistics of determinant factors of 696 firms. Debt is the debt to total
asset ratio (Rs million), Asset Turnover is the sales to total asset ratio (Rs million), Size is the average of
market value (Rs million), Market to book is the average market-to-book ratio for the firm (Rs million), and
Export is the export-to-sales ratio (%).

Table 3. Correlation matrix.

pffiffiffiffiffiffiffi Asset Market Market to Export to
jβit j Debt turnover value book sales
pffiffiffiffiffiffiffi
jβit j 1
Debt 0.123 1
Asset turnover −0.006 −0.016 1
Size −0.171 −0.007 0.249 1
Market to book 0.002 −0.001 0.023 0.111 1
Export −0.091 −0.007 −0.246 −0.026 −0.065 1
Note. All of the correlation coefficients have value close to 10%.

Table 4. Panel unit root tests.

Variables BT HT
pffiffiffiffiffiffiffiffi
jβbit j −6.336*** −6.125***
Debt −4.643*** −6.881***
ER −5.364*** −8.296***
MTB −5.982*** −9.334***
Size −5.744*** −5.683***
Turn −3.452*** −3.093**
pffiffiffiffiffiffiffiffi
jβnit j −6.787*** −6.641***
Note. ** and *** indicate rejection of the unit root hypothesis at the 5% and 1% significance levels. BT =
Breitung (2000) panel unit root test, and HT = Harris and Tzavalis (1999) panel unit root test.

We next estimate exchange rate exposure using the two-factor asset pri-
cing model developed by Adler and Dumas (1984). The descriptive statistics
of all the selected firms are highlighted in Table 5.
Table 5 shows that 149 out of 232 firms are exposed to exchange rate move-
ment. We estimate the exchange rate exposure based on a bilateral exchange rate
between Indian rupees and U.S. dollars. Indian firms are more exposed to USD
exchange rate. The reason for more firms being exposed while considering a
bilateral exchange rate between Indian rupees and U.S. dollars is the bulk of
firms that trade in USD. Out of 149 significantly exposed firms, 96 are manu-
facturing and 53 are service sector firms. The result shows that approximately
70% of service sector firms and 61% of manufacturing firms are exposed to USD
exchange rate changes. One of the interesting findings of this study is that service
204 S. M. MOHAPATRA AND B. N. RATH

Table 5. Descriptive statistics based on bilateral exchange rate in USD.

Full Sample β Significant β
Std. +ve -ve Std. +ve -ve
N Mean dev β β N Mean dev β β
All firms 232 −0.014 0.265 29 203 149 −0.036 0.181 2 147
Manufacturing sector firms 156 −0.016 0.282 24 132 96 −0.051 0.102 1 95
Service sector 76 −0.011 0.226 5 71 53 −0.009 0.270 1 52
firms
Note. Exposure for both of the exchange rate measures and for two different sectors for full sample and
significant firms are reported separately.

sector firms are more exposed to the USD exchange rate. The larger number of
exposed firms in the service sector may explain the fact that most of the
transactions of service sector firms are with US dollars. Finally, mean exposures
of all types of firms under a bilateral exchange rate are negative.
After chronicling the descriptive statistics in Table 5, we examine the
determinants of exchange rate exposure and results presented in Table 6.
The results for overall firms, manufacturing firms, and service firms are
presented in columns (1), (2), and (3), respectively. The first column of this
table presents the results of all the firms. The results show that, except debt, all
other factors, such as asset turnover, market-to-book ratio, export, and size, are
significantly affecting the exchange rate exposure. Factors such as asset turn-
over, market-to-book ratio, and exports are positively significant to exchange
rate exposure. A positive sign indicates that an increase in asset turnover,
export, and market-to-book ratio increases the exchange rate exposure of
Indian firms. This means that when exports of the firm increase, the firm is

Table 6. Determinants of exchange rate exposure (bilateral exchange rate in USD)—only

significant firms.
Overall Manufacturing sector Service sector
Variable (1) (2) (3)
Constant 0.381*** 0.470*** 0.268
(4.10) (4.76) (1.37)
Asset turnover 0.034** 0.053** 0.043*
(1.96) (2.00) (1.64)
Debt 0.013 0.022 −0.072
(0.58) (1.07) (-0.53)
Market to book 0.002* 0.003* 0.021*
(1.67) (1.72) (1.80)
Export 0.295** 0.371*** 0.203*
(5.41) (6.26) (1.67)
Size −0.032*** −0.043*** −0.021**
(-3.18) (-3.90) (-1.96)
N 444 282 147
F test 9.48 12.37 5.71
R2 0.14 0.25 0.09
Hausman# 0.0000(FE) 0.0002(FE) 0.0021(FE)
Note. t-statistics are in parentheses; ***, **, * indicate a significance of 1%, 5%, and 10%, respectively;
#
Hausman test p-values.
 THE INTERNATIONAL TRADE JOURNAL 205

more involved in trade activities and thereby exposed to exchange rate

changes. The asset turnover is positively associated with exchange rate
changes. Market-to-book ratio is used as the proxy of growth opportunities
and a positive relationship is seen between the market-to-book ratio and
exchange rate exposure. This indicates that when a firm’s export and import
activities increase, its exposure to exchange rate changes also increases; how-
ever, the coefficient of size is negative and significantly affects the exchange
rate exposure. Thus, a larger firm is less exposed to exchange rate changes. The
reason may be that large firms are more involved in hedging activities than
smaller firms in India. These findings are consistent with those of Aggarwal
and Harper (2010). Debt is not at all significant for any of the firms.
The results derived from overall firms in column 1 are consistent with the
results of manufacturing- and service-based firms, although the figures do vary
between the manufacturing and service sectors. By comparing both firms, we
notice that factors like export, asset turnover, and size lead to more exposure in
manufacturing firms as compared to service firms. However, market-to-book ratio
has a greater effect on the exchange rate exposure of service firms than manufac-
turing firms. Overall, it is noted from Table 6 that all key determinants except debt
significantly affect the exchange rate exposure, irrespective of whether the firm
belongs to the manufacturing or service sector. Since the data on the firm’s debt is
unknown with regard to the firm’s source of borrowing (internal or external debt),
it’s difficult to explain the reasons.
Next, we consider all of the firms by taking the coefficient of exchange rate
exposure, irrespective of their significance level. We keep the same explana-
tory variables on the right-hand side. The results are illustrated in Table 7.

Table 7. Determinants of exchange rate exposure (bilateral exchange rate in USD)—all firms.
Overall Manufacturing sector Service sector
Variable (1) (2) (3)
Constant 1.020*** 1.444*** 0.417**
(6.33) (5.93) (2.49)
Asset turnover −0.015 −0.094 0.057*
(-0.41) (-1.37) (1.68)
Debt 0.067 0.047 0.097
(1.19) (0.69) (0.77)
Market to book 0.001 0.002 0.010
(0.38) (0.55) (0.85)
Export 0.244** 0.193** 0.223**
(2.08) (1.96) (1.99)
Size −0.097*** −0.127*** −0.046**
(-4.88) (-4.27) (-2.11)
N 687 450 216
F test 5.88 5.22 3.74
R2 0.11 0.08 0.07
Hausman# 0.0005(FE) 0.0007(FE) 0.0021(FE)
Note. t-statistics are in parentheses; ***, **, * indicate a significance of 1%, 5%, and 10%, respectively;
#
Hausman test p-values.
206 S. M. MOHAPATRA AND B. N. RATH

The determinants of exchange rate exposure of the USD for the full sample
firms are presented. Factors such as export and size are again significant for
both manufacturing- and service-based firms. The asset turnover is signifi-
cant at 10% only for the service sector. The market-to-book ratio is not at all
significant for any type of firm. The signs for export and size are similar to
previous results. The negative sign of the size factor indicates that the large
firms are less exposed to exchange rate changes. Overall, the results match
the result shown in Table 6; however, due to full sample size (both significant
firms and insignificant firms), the other determinants of exposure, asset
turnover and market-to-book ratio, lose their significance.

IV. Robustness checks

To check the robustness of our results, in this section, we use the trade-
weighted exchange rate NEER (based on 36 currencies) for the measure of
exchange rate exposure. It captures the foreign exchange values of the
Indian rupee against the currencies of important Indian trading partners.
They are constructed using a weight scheme that is based on trade
competitiveness. Most of the studies used trade-weighted exchange as
the measurement of exchange rate exposure (Adler and Dumas 1984;
Bartov and Bodnar 1994; Choi and Prasad 1995; He and Ng 1998;
Jorion 1990). We chose to use NEER instead of REER for two reasons.
First, if exchange rate exposure is measured with real terms, all of the
other variables in the equation have to be measured in real terms in order
to maintain consistency, but it is difficult to obtain different prices at firm
level to deflate all explanatory variables. Second, the low variability of
inflation differentials on a monthly basis implies that nominal movements
actually dominate real exchange movements (Bodnar and Gentry 1993;
Choi and Prasad 1995; Griffin and Stulz 2001). We estimate the exchange
rate exposure using NEER in Equation (1). Under trade-weighted
exchange rate (NEER), only 68 firms are significantly exposed to exchange
rate. Out of those 68 significantly exposed firms, 48 manufacturing firms
and 20 service sector firms are exposed to exchange rate changes. We also
plot the trade-weighted exchange rate (NEER) and U.S. dollar exchange
rate in Figure 1, and both exchange rates are considerably different. This
implies that Indian rupees have depreciated against U.S. dollars over the
years; however, they have appreciated against the NEER. The figure also
demonstrates the relative volatility of NEER compared to the U.S. dollar.
After obtaining the exposure coefficient in absolute value through
Equation (1), we examine the determinants of exchange rate exposure
using a panel data model by following Equation (2). The model of
Equation (2) is exactly the same as in the previous equation (see Table 6),
 THE INTERNATIONAL TRADE JOURNAL 207

120
100
80
60
40
20
0
Jan-00

Jan-01

Jan-04

Jan-12

Jan-13
Jul-00

Jul-01
Jan-02
Jul-02
Jan-03
Jul-03

Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11

Jul-12

Jul-13
NEER US Dollar

Figure 1. Exchange rates from January 2000 to December 2013 for the trade-weighted index
(NEER) and U.S. dollar.

except the dependent variable exposure is replaced with NEER instead of U.S.
dollars. The results are reported in Table 8.
The results in Table 8 show that asset turnover, market-to-book ratio,
export, and size are the key determinants for exchange rate exposure in the
case of Indian firms. But the results are somewhat different when it comes to
the manufacturing and service sectors separately. In the case of manufactur-
ing firms, market-to-book ratio, export, and size are the key determinants for
exchange rate exposure, whereas, in the case of the service sector, in addition
to these three determinants, debt also plays an important role in the
exchange rate exposure. Further, we observe that export is positive and
statistically significant for both manufacturing and service sectors. Size is
negative and significant for 5% of overall firms and manufacturing firms and
10% for service sector firms. This implies that large firms experience less

Table 8. Determinants of exchange rate exposure (trade-weighted exchange rate, NEER)—only

significant firms.
Overall Manufacturing sector Service sector
Variable (1) (2) (3)
Constant −0.267** −0.189* −0.395
(−2.15) (−1.48) (−1.59)
Asset turnover 0.064* 0.027 0.133
(1.86) (0.86) (1.39)
Debt −0.008 −0.001 0.851**
(−0.31) (−0.07) (−2.56)
Market to book 0.007** 0.005* 0.033*
(2.01) (1.93) (1.74)
Export 0.435*** 0.431*** 0.402**
(5.90) (6.15) (2.19)
Size −0.031** −0.029** −0.053*
(2.22) (2.01) (1.71)
N 201 141 60
F test 11.69 10.79 5.84
R2 0.31 0.37 0.45
Hausman# 0.0000(FE) 0.0000(FE) 0.0002(FE)
Note. t-statistics are in parentheses.*, **, *** indicate a significance of 10%, 5%, and 1%, respectively;
#
Hausman test p-values.
208 S. M. MOHAPATRA AND B. N. RATH

Table 9. Determinants of exchange rate exposure (trade-weighted exchange rate, NEER)—all

firms.
Overall Manufacturing sector Service sector
Variable (1) (2) (3)
Constant 0.351*** 0.510*** 0.131
(3.41) (3.30) (1.14)
Asset turnover −0.012 −0.051 0.026
(−0.51) (−1.17) (1.14)
Debt 0.035 0.033 −0.001
(0.96) (0.76) (−0.02)
Market to book 0.001 0.001 0.016*
(0.47) (0.50) (1.85)
Export 0.184** 0.196* 0.172**
(2.44) (1.65) (2.24)
Size −0.024** −0.033* −0.012**
(−1.96) (−1.76) (−0.82)
N 687 450 216
F test 4.13 3.86 3.84
R2 0.16 0.11 0.09
Hausman# 0.0012(FE) 0.0025(FE) 0.0020(FE)
Note. t-statistics are in parentheses.*, **, *** indicate a significance of 10%, 5%, and 1%, respectively;
#
Hausman test p-values.

exposure. The sign of the market-to-book ratio is positive for all firms, but
not consistent for all three types of firms. The coefficient of asset turnover is
positive and significant for 10% of all firms but not significant at the
disaggregate sectoral level. Overall, the results derived from Table 8 are
consistent with the result presented in Table 6. The findings from our
study are similar to those of Dominguez and Tesar (2001).
Table 9 presents the determinants of trade-weighted exchange rate expo-
sure, irrespective of whether or not the exposure coefficients for all 232 firms
are statistically significant. Again, Table 9 provides results which can be
treated as additional robustness checking. But the results presented in this
table do not exactly compare to the benchmark results exhibited in Table 8.
The results indicate that only two factors, export and size, affect the exchange
rate exposure. The signs of export and size are similar to Tables 6 and 8. In
sum, we find that our additional results, as a part of robustness checking, are
consistent with the results obtained in Tables 6 and 7.

V. Conclusions
The aim of this article was to examine the exchange rate exposure and its
major determinants by taking a sample of Indian firms. We first estimate the
exchange rate exposure for both manufacturing- and service- related firms
over the period of 2000 to 2013. Using a prowess database, we select 232
firms to provide balanced panel data for all of the variables used in this
article. We obtain the exposure coefficient by running a two-factor asset
pricing model for each firm. The results, based on bilateral exchange rate
 THE INTERNATIONAL TRADE JOURNAL 209

(USD), indicate that a greater number of firms are exposed to exchange rate
changes. Service sector firms are more exposed in India as compared to
manufacturing sector firms. Our reason for exposing more firms while
considering bilateral exchange rate (USD) is that the bulk of firms do trading
in U.S. dollars. In the second stage, we try to identify the key factors that
influence the exchange rate exposure among the firms and compare between
the manufacturing and service sectors. The results illustrate that market-to-
book ratio, export, and size are the three most significant factors that
determine the exposure for Indian manufacturing as well as service sector
firms. Further, we document that there is a positive association between
exchange rate exposure with market-to-book ratio and export. A negative
relationship exists between size and the level of exchange rate exposure of
firms. In other words, both manufacturing and service sector firms in India
with high market-to-book ratios and export are likely to face more exchange
rate exposure. These results are robust with the alternative estimation using
trade-weighted exchange rate.

Acknowledgments
The authors gratefully acknowledge the suggestions of the editor and two anonymous referees
on the previous draft of this article. The usual disclaimer applies.

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Appendix 1

Table A1. Trading activities of India with top trading partners.

Export share (%) Import share (%)
Year USA UAE CHINA USA UAE CHINA
2000–2001 20.88 5.82 1.86 5.96 1.30 2.97
2001–2002 19.42 5.68 2.17 6.12 1.77 3.96
2002–2003 20.66 6.31 3.74 7.23 1.55 4.54
2003–2004 17.99 8.02 4.62 6.44 2.63 5.18
2004–2005 16.47 8.79 6.72 6.27 4.16 6.36
2005–2006 16.83 8.33 6.55 6.33 2.91 7.28
2006–2007 14.93 9.52 6.56 6.31 4.66 9.40
2007–2008 12.71 9.59 6.56 8.35 5.35 10.77
2008–2009 11.47 13.11 5.07 6.17 7.70 10.73
2009–2010 10.93 13.40 6.47 5.90 6.73 10.70
2010–2011 10.13 13.53 5.65 5.42 8.85 11.76
2011–2012 11.35 11.75 5.96 4.79 7.48 11.31
2012–2013 12.03 12.10 4.49 5.14 7.97 10.65
2013–2014 12.41 9.69 4.75 4.99 6.41 11.38
Source: Director General of Commerce and Industry (DGCI), Ministry of Commerce, Government of India.