"US-Japan yen intervention raises carry trade unwinding risks for Indian markets"
Carry Trade
borrowing in a low-interest currency to invest in higher-yielding assets elsewhere, profiting from the interest rate differential
Currency Intervention
a central bank or government buying/selling currency in forex markets to influence its exchange rate
Exchange rate management sits at the intersection of monetary sovereignty and international economic coordination. Under a managed floating exchange rate system — which both Japan and India broadly operate — central banks intervene selectively to smooth excessive volatility without committing to a fixed peg. Japan's yen had been under sustained depreciation pressure, falling to 40-year lows, driven by the Bank of Japan's (BoJ) historically ultra-loose monetary policy at a time when the US Federal Reserve had maintained elevated interest rates. This divergence in monetary policy stances between major economies creates the structural conditions for carry trades — a mechanism central to understanding how currency movements in Tokyo can ripple into Mumbai's equity markets.
India's exposure to global capital flows is governed primarily by the Foreign Exchange Management Act (FEMA), with the Reserve Bank of India (RBI) monitoring both Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) channels. FPI — short-term, sentiment-driven capital — is particularly sensitive to global risk appetite, interest rate differentials, and currency movements. The Department for Promotion of Industry and Internal Trade (DPIIT) is the nodal agency for FDI policy, while SEBI regulates FPI registration and market access. India's vulnerability to external monetary shocks is structurally embedded in its status as an emerging market that relies on FPI inflows to finance its current account deficit.
A carry trade is a financial strategy where investors borrow in a low-interest-rate currency (the funding currency) and invest the proceeds in higher-yielding assets denominated in another currency (the target currency). The yen has historically been the world's preferred funding currency because Japan's near-zero interest rates made borrowing in yen extremely cheap. Traders would borrow yen, convert to rupees or other emerging market currencies, and invest in Indian equities or bonds — profiting from the interest rate differential. India's estimated yen carry trade exposure stood at approximately $21 billion (around 2.2% of total FII holdings) as of mid-2024, according to Elara Capital.
The risk embedded in carry trades is unwinding: when the funding currency strengthens sharply, the cost of repaying the yen-denominated loan rises in local currency terms, forcing investors to sell their target-market assets and repatriate capital. A stronger yen therefore mechanically triggers FPI outflows from India — not because India's fundamentals have deteriorated, but because the arbitrage that made the trade profitable has collapsed. …
With reference to the Indian economy, consider the following statements:
1.If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2.If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3.If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given above are correct?
Indian Government Bond Yields are influenced by which of the following?
1.Actions of the United States Federal Reserve
2.Actions of the Reserve Bank of India
3.Inflation and short-term interest rates
Select the correct answer using the code given below.
Consider the following statements:
The effect of devaluation of a currency is that it necessarily
1.improves the competitiveness of the domestic exports in the foreign markets
2.increases the foreign value of domestic currency
3.improves the trade balance
Which of the above statements is/are correct?
Which one of the following is not the most likely measure the Government/Reserve Bank of India takes to stop the slide of Indian rupee?
With reference to the 'yen carry trade', consider the following statements:
1.It involves borrowing in yen at low interest rates and investing in higher-yielding assets in other countries.
2.A strengthening yen increases the profitability of the carry trade.
3.Unwinding of the yen carry trade typically leads to capital outflows from emerging markets like India.
Which of the statements given above is/are correct?
Which of the following best explains why the United States has a direct interest in preventing excessive depreciation of the Japanese yen?
Consider the following statements about Foreign Portfolio Investment (FPI) in India:
1.FPI flows are governed under the Foreign Exchange Management Act (FEMA).
2.DPIIT is the nodal agency responsible for regulating FPI registration and market access.
3.FPI is generally more sensitive to global monetary conditions than Foreign Direct Investment (FDI).
Which of the statements given above is/are correct?
Assertion (A): A decision by the US Federal Reserve to cut interest rates can lead to increased Foreign Portfolio Investment inflows into India.
Reason (R): Lower US interest rates reduce the relative attractiveness of US assets, prompting investors to seek higher returns in emerging markets like India.
Select the correct answer:
With reference to currency market interventions, which of the following statements is/are correct?
1.Under a managed floating exchange rate system, central banks commit to maintaining a fixed exchange rate at all times.
2.Selling foreign exchange reserves is a tool used by central banks to prevent excessive depreciation of the domestic currency.
3.Joint currency interventions between two countries require a pre-existing bilateral framework or agreement.
Want the full note, Prelims Facts & MCQ answers?
Create a free account — takes less than a minute.
Create free account