What is carry trade ?
A carry trade is a widely used trading strategy where an investor borrows funds from a country with low interest rates, typically using a weaker currency (such as the Japanese yen), and invests those funds in assets from another country that offer higher returns.
Effect of Strong Yen on Indian Companies
Yen Strength and Carry Trade:
– The Japanese yen has strengthened due to the Bank of Japan raising interest rates last week.
– Investors in yen carry trades are now forced to liquidate their positions.
Impact on Indian Infrastructure:
– For the past decade, India has benefited from Japan’s zero-interest loans.
– This friendly relationship has helped fund Indian infrastructure projects.
Use of Cheap Yen Loans:
– Indian companies have used these cheap yen loans to finance road, highway, power sector projects, and steel production.
– Investors also used yen loans to finance both Indian and global stock markets.
Direct Impact on Indian Debt:
– Japan’s currency strength will affect Indian debt.
– According to RBI data, India’s external debt increased by 39.5% to $663.8 billion since March 2015.
– Of this, half is in U.S. dollars, and yen-denominated debt was 5.8% as of March 2024.
Increase in Yen-Denominated Debt:
– India’s yen-denominated debt grew from $19 billion in 2015 to $38.5 billion by March 2024.
– The yen’s strengthening has made these loans more expensive.
Impact on Indian Companies:
– Companies that took long-term yen loans will face higher costs due to the yen’s appreciation.
– Japanese Official Development Assistance (ODA) loans, used for projects like the Delhi Metro and bullet trains, had very low interest rates.
Increased Import Costs:
– The yen’s rise will increase the cost of imports and worsen the trade balance.
– India imports more from Japan than it exports.
Effects on Major Companies:
– Companies like NTPC, REC, JSW Steel, PFC, and HUDCO raised over ₹2,600 crore in the past year.
– Railway capital expenditures will also be affected by higher costs.
