Under a floating exchange rate, firms have a correct estimate of how risky it is to have unhedged foreign currency exposure. When a central bank artificially distorts currency volatility downwards, as RBI has often done, this gives out the wrong incentives to take on foreign currency risk. Now firms in India are lobbying that they be permitted to delay marking to market of exchange rate losses in the aftermath of a surprising rupee depreciation. Mahesh Vyas has facts on Indian firms and currency exposure, in the immediate context of the debate on fudging AS 11 disclosures. Also see editorials in Financial Express and Business Standard.
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