According to a Reserve Bank of India (RBI) Working Paper, the optimal hedge ratio for the External Commercial Borrowings (ECBs) raised by firms in India is estimated at 63 per cent for the periods of high volatility in the foreign exchange (forex/FX) market. An optimal hedge ratio is a ratio that implies the percentage of total asset or liability exposure that an entity ought to hedge against exchange rate fluctuations.
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According to the Paper, domestic economic activity and movements in the exchange rate of the Indian rupee are the two major factors influencing the ECBs issuance. Depreciation of the Indian rupee has an adverse impact on the issuance of ECBs in the short as well as long run.
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