Impact of exchange rate volatility on investment: evidence from India

Abstract

This paper studies the impact of real exchange rate volatility on firm level investment using data on Indian manufacturing firms. Real exchange rate volatility is found to have a negative impact on firm level investment spending. The impact is non-linear in the level of exchange rate volatility and depends upon the size of firm s mark-up and its trade exposure. Foreign equity ownership reduces the negative impact of exchange rate volatility significantly but the same cannot be said about access to domestic equity finance.