Impact of Currency Fluctuations on Financial Performance of South Asia Manufacturing Firms

Abstract

The main objective of the study is to test empirically the effect of currency fluctuations and macroeconomic determinants on the financial performance of manufacturing companies in the Asian region referred to as South Asia. With an ever more globalized economy, manufacturing industries in developing economies are becoming more vulnerable to external economic shocks, especially those caused by fluctuation in the exchange rates.The empirical analysis is based on secondary panel dataset on the sample of 2014 to 2024 and manufacturing firms in the South Asian countries and financial performance indicators is based on Return on Assets (ROA) and Return on Equity (ROE) and the macroeconomic regressors are Exchange Rate Volatility (ERV), Inflation (INF), Interest Rates (INT), and Gross Domestic Product (GDP) The research adopts a systematic econometric protocol that involves the Variance Inflation Factor (VIF) to identify multicollinearity and the LevinLinChu (LLC) and ImPesaranShin (IPS) unit-root tests to determine stationarity and the Hausman specification test to test a model. Depending on the results of the diagnosis, a Fixed-Effect model is then used. Results show that the negative association between ERV and ROA, as well as ROE, is statistically significant, which supports the hypothesis that the currency fluctuation on the profitability. Quite the opposite, the effects of inflation, interest rates, and GDP in the final specification are statistically non-significant On the other hand, the exchange-rate stability is a crucial determinant of performance of firms in the region. The study, thus, indicates that corporate managers should to adopt strict hedging guidelines and that the policymakers ought to prioritize in the exchange-rate stabilization policies over the macro-monetary policies.