Exchange rate volatility and its impact on borrowing costs

Ashima Goyal and Sritama Ray ()
Additional contact information
Sritama Ray: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: Reducing borrowing costs for emerging markets (EMs) is a challenge. The additional country risk premia that foreign investors seek are primarily driven by a fear of unexpected currency depreciation; which often does not take place. It follows there are positive excess returns from EM assets. We find while the interest rate differential (IRD) is near-zero for advanced economies, it is always positive for EMs. Excess exchange rate volatility is often due to global and not domestic factors, so that a pure float aggravates instead of mitigating shocks. Lower exchange rate volatility, risk and risk-perceptions can reduce EM IRDs. A suitable exchange rate regime and domestic as well as international prudential regulation on cross-border capital flows can lower volatility. Different phases of India's flexible float illustrate these issues well.

Keywords: Exchange rate volatility; emerging markets; advanced economies; interest rate differentials; excess returns; global shocks; policies (search for similar items in EconPapers)
JEL-codes: E65 F31 F41 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2025-12
New Economics Papers: this item is included in nep-ifn
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.igidr.ac.in/pdf/publication/WP-2025-026.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2025-026

Access Statistics for this paper

More papers in Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India Contact information at EDIRC.
Bibliographic data for series maintained by Shamprasad M. Pujar ().