Yen Carry Trade: India's Infra Spending May Face The Brunt

A rising Yen is creating havoc across markets as Yen Carry Trade is forcing investors to liquidate their positions after the Bank of Japan raised interest rates last week. This, in turn, can have a direct impact in Indian infrastructure companies.

India has been one of the biggest beneficiary of the near-zero interest rates that existed in Japan. The strategic and friendly relationship between both the Asian power houses saw cheap capital available to fund India's infrastructure push in the past ten years. Moreover, it also pushed Indian companies to raise cheap funds to fuel their capital expenditure in the area of road and highways, power sector financing and steel. Among these, infrastructure firms have been the biggest beneficiary of low-cost yen loans.

While investors have used cheaper Yen loans to finance stock market trade in India, as well in line with global equity trade, the exposure to direct Japanese investors in the market has risen from Rs 38,000 crore in December 2015 to Rs 2.05 lakh crore in June 2024. A key reason has been Japanese banks increasing their India exposure in their chase for returns.

The Japanese currency also has an impact on India's debt. India's external debt rose by 39.5% since March 2015 to $663.8 billion, according to RBI data. While more than half of this external debt is denominated in US dollar, Japanese Yen denominated loans stood at 5.8% at the end of March 2024.

India's exposure to Yen denominated loans has doubled since 2015 from $19 billion in March 2015 to $38.5 billion at the end of March 2024, as per calculations of NDTV Profit based on RBI data.

The impact of Yen Carry Trade will be felt through currency impact on the loans undertaken by Indian companies. The shift in policy by Japanese central bank and subsequent tightening has seen the Yen appreciate by 10% against the Indian currency. Yen hit a 34-year low in April when the Japanese central bank moved the interest rates higher. Last week it again raised the rates to 0.25%.

Going forward, the Yen Carry Trade will lead to an increase in the debt serving cost of India companies who have raised long-term Yen loans in the last 10-years backed by near-zero interest rates.

It is noteworthy that India is the largest recipient of Japanese Official Development Assistance (ODA) loans, from Delhi Metro to India’s first Bullet train receiving generous loans at low interest rates of 0.1% to 1.8%. These loans are premised on the condition that India will import technology and metal from Japan. At least 25% railway projects have been tied to these procurement mandates.

A rising Yen would increase the cost of imports and distort the trade balance further. India is net importer from Japan.

Many Indian companies like NTPC, REC, JSW Steel, PFC and HUDCO had raised over Rs 12,600 crore in the last one year. In addition railway capex will also be impacted as cost of capex is likely to increase.