Indian Rupee (INR) has depreciated against US Dollar (USD) the most (about 8.3 percent) in comparison with other major currencies such as Euro (EUR), Great Britain Pound (GBP), Japanese Yen (JPY) and Chinese Yuan (CNY) in the last five years. The USD appreciation is due to various factors such as an increase in India’s trade deficit, fears of a trade war, surging oil prices and instability in Eurozone among many others (Anoyn, 2018). The changes in the exchange rates will affect the firms from different industries in three ways.
First, transaction exposure, which is created by the transactions of the firm involving cash flows resulting from activities such as imports, exports, payment/receipt of interest royalty etc. If there is a change in the exchange rate consequent upon the transaction, the revenue and profit margins will be disturbed. For instance, an Indian company exports goods invoiced in USD receivable after three months without knowing the exchange rate of USD/INR. If USD appreciates against INR for three months, the exporter’s INR revenue will decrease. Second, the changes in exchange rates may result in gains or losses in the consolidation of financial statements of foreign subsidiaries. This exposure is known as translation exposure. Third, the changes in the exchange rates might affect the firms’ competitive position in the market and the long-term cash flows. This is known as economic exposure (Eun & Resnick, 2012). The nature of the industries will have decided if they are going to be benefitted or affected by the exchange rate changes.