Aug 13, 2024
YEN CARRY TRADES and GLOBAL MARKETS
1. What is a Carry Trade?
• A carry trade involves borrowing money in a country with low-interest rates and investing it in another country with higher rates to profit from the interest rate difference.
2. What Happened in Japan?
• The Bank of Japan increased its interest rates, which was a significant change as the rates had been low for a long time. This caused the yen to become stronger against the US dollar, appreciating by 10% in just over three weeks.
3. How Did This Affect Global Markets?
• The increase in Japanese interest rates led to a large-scale unwinding of yen-funded carry trades. This means investors who had borrowed yen and invested elsewhere began selling off their investments to repay the yen loans, causing the yen to rise sharply and leading to instability in global markets, with declines in stock indices.
4. Impact on Indian Markets:
• Currency Depreciation: The appreciation of the yen made the Indian rupee weaker in comparison. For example, if previously 1 yen was worth 0.7 rupees, after the appreciation, it became worth 0.77 rupees. This means the rupee lost value against the yen.
• Stock Market Decline: As the yen strengthened, Japanese investors in Indian markets began to sell their holdings to take advantage of the favorable yen exchange rate. For instance, if a Japanese investor had 10 million yen invested in Indian stocks, the appreciation of the yen increased the value of their investment in yen terms, leading them to sell and take profits. This selling pressure contributed to a decline in Indian stock market indices.
5. Future Expectations:
• Impact on External Debt: India has borrowed money, some of which is denominated in yen. As the yen strengthens, the cost of repaying these loans in rupees increases. For instance, if India borrowed 1 billion yen when 1 yen was worth 0.7 rupees (totaling 700 million rupees), and now 1 yen is worth 0.77 rupees, India would need 770 million rupees to repay the same 1 billion yen loan, making it more expensive for India to service its debt.
• Effect on Infrastructure Funding: India has taken low-interest loans from Japan for infrastructure projects. If Japan’s interest rates rise, new loans could become more expensive, and existing loans might have higher servicing costs. For example, if India had a loan at a 0.5% interest rate and the rate increases to 1.0%, the cost of borrowing for new projects would double, making it more costly for India to fund infrastructure development.
These developments can significantly affect India’s economy, influencing financial stability and future growth plans.
SRIRAM's
