While the Bank of Japan’s (BoJ) decision to raise interest rates by 25 basis points to 0.75%—the highest level in three decades—could increase financing costs on yen borrowings and amplify foreign-exchange losses on unhedged loans, Indian companies are taking it in their stride – at least for now.
Consultants and rating agencies, however, cautioned that yen borrowing and hedging costs are likely to rise. Soumyajit Niyogi, director at India Ratings & Research, said “the combined impact of capital flows and higher yen borrowing costs remains a key risk to monitor for Indian companies.”
Ranen Banerjee, partner and economic advisory leader at PwC India, said bond yields would rise immediately, effectively shutting off a segment of low-cost international borrowing that Japan has long provided. “Companies with yen-denominated borrowings will also face mark-to-market treasury losses,” he said.
Closing the Arbitrage Window
Corporates are unlikely to pursue fresh yen borrowings, as the interest-rate arbitrage between India and Japan has narrowed, reducing the incentive for new loans, said Ritesh Bhansali, deputy CEO at Mecklai Financial Services.
Companies such as REC, Reliance Industries, Power Finance Corporation, Tata Steel, Adani Group firms, NTPC and others have raised yen-denominated loans worth over ₹60,000 crore, according to industry estimates. PFC, REC and NLC India together have unhedged yen loans of nearly ₹13,000 crore taken at low Japanese rates, but the yen’s recent appreciation has heightened their forex risk and could lead to potential mark-to-market losses — or the unrealised ‘paper losses’ that occur when an asset’s current market value drops below its recorded book value, requiring financial statements to reflect this decline — in some cases.
Unhedged Risks
An executive at a state-owned company with significant yen exposure, however, said “yen borrowing costs will obviously rise, but the majority of our floating-rate loans are hedged at fixed rates, so there is no direct impact on existing borrowings. Fresh loans, however, would cost more.” Foreign-currency borrowing is also less compelling at present due to cheaper domestic rupee options and heightened rupee volatility, the executive added. “So we are moving very slowly on it.”
Some companies also point out that the quantum of the BoJ’s rate hike was lower than expected. “The market was expecting a 50-basis-point hike, but it was only 25 bps. So it will not significantly raise our costs or materially affect our portfolio,” said an executive at another company that had raised yen loans earlier.
The executive added that the recent depreciation of the rupee is seen as temporary. “When it comes to external commercial borrowings, we take a long-term view. One- or two-month fluctuations do not dictate hedging levels—it’s a forward-looking decision. If the trend persists, hedging costs will rise, but ECBs are assessed over a five-year horizon, not one or two years.”
For Indian markets, the BoJ rate hike could mean some moderation in foreign portfolio inflows, especially into equities and debt. However, the risk of a sharp reversal is limited. Japanese rates remain low by global standards, and India’s growth premium is still compelling. At worst, companies may see higher equity market volatility rather than a sustained capital flight.
Analysts said for companies with yen-denominated liabilities, a stronger yen increases repayment costs. However, such exposure is limited to a small set of large corporates. But structurally, India remains a strategic destination. Japan’s demographic challenges and low growth at home mean overseas expansion is still essential. If anything, Japanese investors may become more selective, favouring stronger balance sheets and clearer governance.