Abstract
The study investigated the empirical validity of foreign exchange rate risk exposure in Indian stock market. The analysis was conducted both at the firm and at the industry level. The necessary daily data of stock prices and industry indices were retrieved from the PROWESS industry database provided by the Centre for Monitoring Indian Economy (CMIE). For the exchange rate, bilateral Indian Rupee (INR)/US Dollar (US$) exchange rate was collected from the Pacific Basin Exchange Rate Services maintained by the Columbia University, USA, and the OANDA database, USA. The period of study ranges from 1 January 1992 to 31 December 2005. The analysis reveals that all firms and industries under study have significant exchange rate risk exposures on stock market prices. It is found that higher exports are associated with a more positive exposure to exchange rate depreciation, while higher imports are associated with a more negative exposure. In addition to this, we also found that the exchange rate is an important causing factor for the volatility of share prices and indices of majority of the companies and industries during the study period.
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