This study examines the relationship between foreign currency borrowing and financing
constraints for Indian firms. Using panel data for 2,512 non-financial listed firms in India
during 1996-2016, this study finds that the sensitivity of investment to internal cash flows, an
indicator of financing constraints, is higher for firms with foreign currency debt exposure
compared to other firms. Financing constraints are higher prior to new foreign currency
borrowing compared to a matched sample of firms with only domestic borrowing, but
decrease after foreign borrowing, suggesting that foreign debt reduces firms' financing
constraints. Moreover, firms that have relationships with either private or foreign banks have
higher financing constraints when undertaking new foreign borrowing compared to those
enjoying exclusive relationships with only government-owned banks. The financing
constraints for foreign currency borrowers are also found to be higher during domestic credit
booms compared to other periods. Non-manufacturing firms and those with lower than
median export revenues and higher than median tangible assets experience greater financing
constraints compared to other firms when they borrow in foreign currencies. These findings
provide new evidence on the role of foreign currency borrowing in mitigating financing
constraints in emerging market economies.