Foreign Currency Borrowing of Corporations as Carry Trades: Evidence from India

We establish that macroprudential controls limiting capital flows can curb risks arising from foreign currency borrowing by corporates in emerging markets. Firm-level data show that Indian firms issue more foreign currency debt when the interest rate differential between India and the United States is higher. This "carry trade" relationship breaks down once regulators institute more stringent interest rate caps on borrowing; riskier borrowers cut issuance the most. Stock price exposure of issuers to currency risk rises after issuance, a source of vulnerability during the "taper tantrum" episode of 2013, which macroprudential controls subsequently nullified, as confirmed during the COVID-19 outbreak.