EXCHANGE RATE RISK AND PROFITABILITY OF EXPORT-ORIENTED INDIAN SMES

Harshita

doi:10.29121/shodhkosh.v3.i1.2022.6361

Authors

Harshita Research Scholar, Department of Commerce, Kalinga University Raipur

DOI:

https://doi.org/10.29121/shodhkosh.v3.i1.2022.6361

Keywords:

Exchange Rate Risk, Profitability, Smes, Export Orientation, Hedging Strategies

Abstract [English]

Small and Medium Enterprises (SMEs) are the most significant part of the industrial economy in India and the largest exporters. However, fluctuations in the exchange rate expose export-oriented SMEs to foreign exchange risk, which directly affects profitability. In this paper, the association between exchange rate risk and the profitability of Indian SMEs has been looked into in terms of their hedging behaviour, their perception of risk, and the instruments they used to reduce losses. Based on primary and secondary data collected among SMEs in export-based industries like textiles, engineering and agro-based products, the research indicates that there are a greater number of firms with high turnover that are vigorous in using currency derivatives compared to smaller firms that use natural hedging or are not hedged at all. The results affirm the existence of a strong correlation between the exchange rate volatility, hedging strategy adopted, and profitability. It also develops recommendations to enhance risk management measures, raise awareness, and enhance the resilience of SMEs in international trade.

References

Allayannis, G., & Weston, J. P. (2001). The use of foreign currency derivatives and firm market value. Review of Financial Studies, 14(1), 243–276. https://doi.org/10.1093/rfs/14.1.243 DOI: https://doi.org/10.1093/rfs/14.1.243

Bartram, S. M. (2008). What lies beneath: Foreign exchange rate exposure, hedging and cash flows. Journal of Banking & Finance, 32(8), 1508–1521. https://doi.org/10.1016/j.jbankfin.2007.07.004 DOI: https://doi.org/10.1016/j.jbankfin.2007.07.013

Bartram, S. M., Brown, G. W., & Minton, B. A. (2010). Resolving the exposure puzzle: The many facets of exchange rate exposure. Journal of Financial Economics, 95(2), 148–173. https://doi.org/10.1016/j.jfineco.2009.09.002 DOI: https://doi.org/10.1016/j.jfineco.2009.09.002

Cheung, Y.-W., Chinn, M. D., & Garcia Pascual, A. (2013). Empirical exchange rate models of the nineties: Are any fit to survive? Journal of International Money and Finance, 32, 1131–1150. https://doi.org/10.1016/j.jimonfin.2012.10.011

Dhasmana, A. (2015). Exchange rate volatility and firm performance: Evidence from Indian manufacturing firms. Indian Growth and Development Review, 8(2), 181–207. https://doi.org/10.1108/IGDR-09-2014-0035

Kanagaraj, A., & Sikarwar, E. (2011). Foreign exchange risk management practices of Indian firms: An empirical study. Asian Academy of Management Journal of Accounting and Finance, 7(2), 1–24.

Morey, M. R., & Simpson, M. W. (2001). To hedge or not to hedge: The performance of simple strategies for hedging foreign exchange risk. Journal of Multinational Financial Management, 11(2), 213–223. https://doi.org/10.1016/S1042-444X(01)00030-6 DOI: https://doi.org/10.1016/S1042-444X(00)00050-5

Prasad, S. (2016). Exchange rate exposure of Indian firms: Evidence from capital markets. IIMB Management Review, 28(4), 234–244. https://doi.org/10.1016/j.iimb.2016.09.002 DOI: https://doi.org/10.1016/j.iimb.2016.08.010

Prasad, S., & Krishna, P. (2016). Hedging foreign exchange exposure: Evidence from Indian firms. The IUP Journal of Applied Finance, 22(3), 47–62.

Sikarwar, E. (2014). Exchange rate exposure of Indian industries. Journal of Economic Policy and Research, 9(2), 1–20.