The recent rise of the long-depreciated yen and the rush among currency traders to unwind their long positions in the Japanese currency are likely to have mixed implications for the Indian economy. In terms of external trade, the impact would be positive with New Delhi’s shipments to the world’s third largest economy, with which it runs a significant trade deficit, gaining in competitiveness.
If the rise of yen against the US dollar is sustained — most analysts believe it won’t — it could then lead to a marginal rise in the stock of India’s external debt denominated in the Japanese currency, which is of the order of $36 billion now. Some of the infrastructure projects in India, especially those in the power sector, which are directly or indirectly funded out of yen-denominated loans, could turn costlier with their debt-servicing costs inching up. However, the economy-wide impact could be marginal again, as the largest Japanese loans to India are under fixed interest rates, with currency risks hedged.
According to an official from the Dedicated Freight Corridor Corporation of India (DFCCIL), the current development will have “no impact” on the entity, as the borrowings from the Japan International Cooperation Agency (JICA) are under the fixed-liability overseas development assistance (ODA) programme.
While public sector lenders PFC and REC have exposure to yen debt, analysts discounted fears of any big impact on them from the currency’s rise, that followed the Bank of Japan raising interest rates. “When they (REC/PFC) borrow (in foreign currency), they do have a certain hedge. They have a part of foreign borrowings which are already hedged for up to 5 years, and the debt is thus taken care of. This (yen appreciation) should not drastically change anything for them,” according to an analyst who did not wish to be identified.
The person, however, added the debt costs of India’s non-banking finance companies (NBFCs) would continue to be elevated, given that the Reserve Bank of India is seen to delay the rate cut cycle. Some analysts are a bit concerned though. According to Ajay Srivastava, founder of Global Trade Research Initiative (GTRI), the appreciating yen does affect the “carry trade” strategy, where investors borrow yen at low-interest rates to invest in higher-yielding assets. “As yen rates rise, this strategy becomes less profitable, which could shift investment flows and impact global markets, including India.”
The exchange rate between the US dollar and yen fluctuated over the past week. From around 155 on July 30, the yen surged to seven-month high — 141.675 per dollar at some point — on Monday, amid fears of a serious US economic downturn and bigger rate cuts by the Federal Reserve. As such, the dollar index fell below the psychologically crucial 103 level in Asian trade on Monday.
To be sure, the DFCCIL’s borrowing from JICA stands at 580.787 billion yen. These are STEP (special terms of economic partnership) loans which signed between JICA and India’s ministry of finance. The loans are passed on to the ministry of railways at 7% interest with a 10-year moratorium period. The railways ministry, in turn, passes on these loans to DFCCIL as gross budgetary support. “Given that the first tranche of the JICA loan was signed in 2013, the moratorium period seems to be partially over… However, there’s no currency fluctuation risk for us (DFCCIL) or the Railways as the interest rate is fixed, and there’s no principal re-payment obligation on DFCCIL,” the DFCCIL official, quoted above, said.
India’s exports to Japan rose 12% on year in April-May this fiscal, reversing the contraction (-5.6%) in the last financial year. Import of goods from Japan saw a marginal 1% decline in the first two months of the current financial year as against a 7% year-on-year rise in FY24. A stronger yen would mean India’s export pace to Japan could accelerate. They key products in India’s export basket to Japan are organic chemicals, auto and auto components, apparel, steel and pharmaceuticals, whereas the country predominantly imports machinery, electronic goods, plastic, etc.
“There isn’t much a concern among traders. The yen was one of the most depreciated among the major global currencies for long, along with Russian ruble and Brazilian real. Some correction was due,” Ajay Sahai, director general and CEO, Federation of Indian Export Organisations, said.Of India’s present external debt of $620.7 billion, yen’s share is 5.8%. An appreciating yen means that India will need to spend more to repay these debts.
Key infrastructure projects like the Mumbai Metro Line 3 and the Delhi Mass Rapid Transport System Phase 4 are funded via Japanese loans. “While these projects are crucial for improving urban transport and combating climate change, they will now be more expensive due to the stronger yen. The RBI must closely watch these developments and possibly adjust its financial strategies to manage the increased costs, “ said Srivastava.