International Journal of Business and Economics Volume 24, No. 1 June, 2025

Managed Float Regime and Transmission of Currency Risk: Indian Experience of Foreign Currency Borrowings

Santushti Gupta

T A Pai Management Institute, Manipal Academy of Higher Education, Manipal, Karnataka, India

Prasenjit Chakrabarti

Finance & Accounting Area, Indian Institute of Management Ranchi, India

Sudipta Sen

Jindal School of Banking & Finance, O.P. Jindal Global University, India

Abstract

This study examines the linkage between firms' risk exposure and Foreign Currency Borrowing (FCB) within a managed float currency regime. A managed float regime offers an intriguing setting, as it can potentially induce a moral hazard problem. A moral hazard problem created by the managed float regime encourages firms to recklessly use FCB which could impact their risk exposure. We analyse the data of Indian firms for the period from 2012 to 2019. We measure the firms' risk exposure by modelling it as both default and equity risks. Our findings show that firms with FCB-heavy balance sheets are relatively more exposed to both default and equity risks as compared to firms with FCB-low balance sheets. The findings of this study showcase that a managed float regime has induced a moral hazard problem in India making FCB a transmission vehicle through which currency risk is transmitted to the economy. Based on our investigation, we recommend an exchange rate policy where the currency exchange rate is more market-driven. Such a policy can simultaneously help in developing of a well-functioning currency derivatives market in India and mitigate the financial stability concerns in the economy.

Keywords：Foreign Currency Borrowing, Currency Risk, Firm Risk, Managed Float Regime, Risk Exposure

JEL Classifications：G15, G28, F31

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