The recent fear around the Yen carry trade has resulted in an outflow of capital from India. This investment technique entails borrowing money at low interest rates in Japan (yen) and investing it in higher-yielding assets abroad. According to Elara Capital, last week India saw the highest weekly redemption since June 2022, totaling $437 million, with $320 million coming from Global Emerging Market (GEM) funds. On August 5, 2024, the Bank of Japan (BOJ) adjusted its interest rate stance, signaling a substantial policy move. This measure was intended to address growing worries about the yen's weakening and the risks connected with the yen carry trade.
BOJ Intervention: The central bank's move to change its interest rate policy caused the Japanese yen to temporarily strengthen. INR/JPY Low: Consequently, the INR/JPY currency pair reached a low of 1.69. This level is a critical support level for the yen and a possible inflection point for the yen carry trade.
Accelerated Unwind Risk: If the INR/JPY rate falls below 1.69, the yen carry trade may unwind faster. While the scenario created a short setback, the tide appears to be changing this week, with a net inflow of $170 million. However, a new pattern has emerged: the fall of Yen-denominated funds. This is the first such outflow since India's Yen carry trade began.
Although the amount is now small ($66 million), it represents a potential shift in investor attitude. So far, all redemptions have come from mid-cap funds. "In the previous Yen carry cycle of 2016-2018 in India, we saw flows slowing down by Jan'18 and turning negative by Feb'18," said Sunil Jain at Elara Capital.
Interestingly, despite the Yen carry-related outflows, overall inflows to India remain positive, with other areas filling the gap. South Korea, in particular, has emerged as a significant contributor, with inflows hitting a 10-week high of $66 million. "India dedicated funds had inflows of $279 million (the trend has moderated compared to the average weekly inflow of $750 million following the election results).
"The correction was used as an opportunity for South Korean and UK investors to increase their allocation to India," Jain said. Domestic investors have also benefited from the recent market downturn, resulting in steady inflows into global equities funds. "This week, global equities funds witnessed inflows of $11.5 billion, driven by $5.4 billion inflows from US funds.
"Yen-denominated flows in the United States have not yet shown any negative readings," Jain added. Despite the hysteria over the yen carry trade, investors have retained their interest in riskier assets such as junk bonds and emerging market equities. This is seen in the consistent flow of capital into various asset types. Gold has grown in popularity as a safe-haven asset, with investment flows quickening over the past three years
