Key Details
The IMF paper, Global Dollar Exposure and Its Relationship with CIP Deviations, examines dollar assets, liabilities and currency-hedging conditions across 40 economies between 2013 and 2024.
Area | Finding | Why It Matters |
|---|---|---|
Global dollar exposure | Dollar assets increased from about US$19 trillion in 2013 to US$42 trillion in 2024, while liabilities grew more slowly | A larger volume of dollar investment and borrowing increases the potential effect of exchange-rate and hedging-market disruptions |
Advanced economies | Dollar assets increasingly exceed liabilities, with non-banks driving most of the growth | Funds, insurers and other investors create substantial demand to protect dollar assets against exchange-rate movements |
Emerging markets | Banks generally hold net dollar assets, while non-banks hold more dollar liabilities than assets | Dollar-related vulnerability is more likely to sit with companies and other non-bank borrowers |
Source of hedging pressure | Demand for hedges dominates in advanced economies; constraints on hedge supply appear more important in emerging markets | The availability of forwards and swaps can influence the cost and currency composition of borrowing |
India-related signal | India’s measured dollar liabilities exceeded its measured dollar assets in the paper’s 2024 comparison, alongside a substantially negative cross-currency basis | Under the authors’ model, these conditions can make fully hedged dollar borrowing relatively attractive |
India’s position is consistent with the paper’s wider emerging-market finding. The authors do not separately test India or establish that hedging constraints caused its dollar-liability position.
Dollar Exposure Is No Longer Mainly a Banking Issue
The paper constructs a new dataset combining IMF, US Treasury, BIS, central-bank and previous research data on dollar equities, debt securities and bank claims. Foreign-exchange reserves and FDI are excluded.
Dollar exposure differs sharply across economies:
In advanced economies, non-banks accounted for 83% of the increase in dollar assets.
In emerging markets, banks accounted for about 73% of the increase.
Emerging-market banks generally held more dollar assets than liabilities.
Emerging-market non-banks collectively held more dollar liabilities than assets.
The emerging-market vulnerability therefore extends beyond banks to companies and other non-bank borrowers with dollar liabilities.
Hedging Markets Can Influence Dollar Borrowing
In advanced economies, larger dollar-asset holdings increase demand for hedging and are associated with more negative covered interest parity (CIP) deviations.
The relationship is reversed in emerging markets, where the paper points to the supply of currency hedges. Regulation, taxation, market access and intermediary balance-sheet capacity can affect forward and swap prices and, in turn, the relative cost of dollar borrowing.
This creates a feedback loop: hedging conditions affect the cost of dollar debt, which can influence how much dollar debt firms issue.
The relationship remains significant after controlling for sovereign credit risk and is driven mainly by non-bank exposures.
India’s Risk Depends on Who Borrows and How They Hedge
The paper’s 2024 comparison places India on the net dollar-liability side, alongside a substantially negative cross-currency basis. Within the model, this can make fully hedged dollar borrowing relatively attractive compared with domestic-currency finance.
This does not establish why Indian firms borrow in dollars. It does show that aggregate foreign debt alone provides an incomplete picture.
The relevant risks depend on:
which sectors hold dollar liabilities;
whether borrowers earn in dollars or rupees;
how much and how long exposures are hedged;
when debt and hedges must be rolled over; and
whether markets can absorb a simultaneous rise in hedging demand.
What Is a Currency Hedge?
A currency hedge reduces the uncertainty created by exchange-rate movements. For example, an Indian company that borrows in dollars but earns revenue in rupees can use a forward or swap contract to lock in the exchange rate at which it will obtain dollars for repayment. This makes the future rupee cost of servicing the loan more predictable.
Hedging removes or reduces currency uncertainty, but it is not free. Its price can materially change whether overseas borrowing is cheaper than a rupee loan.
What Is a CIP Deviation?
Covered Interest Parity (CIP) is a difference between the cost of obtaining dollars through direct borrowing and through a currency swap after accounting for interest and forward exchange rates. A more negative cross-currency basis can make hedging dollar assets more expensive while making fully hedged dollar borrowing relatively cheaper.
Policy Relevance
Assess foreign borrowing and hedging together: External commercial borrowing figures should be read alongside borrower-level hedge ratios, maturities and sources of revenue.
Pay particular attention to non-bank liabilities: The paper’s emerging-market result is driven mainly by non-banks, making corporate foreign-currency exposure especially relevant for India.
Evaluate market depth and access: Authorities need to know whether forward and swap markets provide adequate liquidity and maturity coverage during normal conditions and periods of stress.
Monitor the cross-currency basis as a financing signal: Changes in swap pricing can alter firms’ preference for dollar debt even when Indian and US policy rates remain unchanged.
Focus on currency mismatches, not dollar borrowing alone: External debt can finance productive investment, but vulnerability increases when firms earn mainly in rupees while carrying large or incompletely hedged dollar obligations.
Strengthen exposure data: Sector-level information linking dollar liabilities with hedge coverage and duration would make concentrated currency and refinancing risks easier to identify.
Follow the Full Working Paper Here: Global Dollar Exposure and Its Relationship with CIP Deviations