Why did the YEN unwind not disturb India ?

Understanding the Yen Carry Trade and Its Impact

Recently, a significant event unfolded in the financial world involving the Yen carry trade. The Yen began to appreciate against the US dollar, largely due to a rise in interest rates in Japan while US yields started to decline following the FOMC meeting. This shift affected those who had borrowed in Yen to invest in US stocks, as their profit margins began to shrink. This type of trade, where investors borrow in a low-interest currency like the Yen and invest in higher-yielding assets, can create ripple effects in global markets.

The Influence of Yen Carry Trade on US Tech Stocks

A close look at market data shows that much of the liquidity from the Yen carry trade flowed into seven major US tech stocks. Companies like Amazon, Nvidia, and Apple, among others, saw significant investments, likely due to the borrowed Yen. The trend of Yen depreciation, where the Yen moved from 130 to 160 against the US dollar, appears to be closely linked with the performance of these top tech stocks. This correlation highlights how currency movements can have a direct impact on specific sectors within the stock market.

Limited Impact on Indian Markets

Interestingly, while this unwinding of the Yen carry trade caused some jitters globally, India remained relatively unaffected. The primary reason is that India hasn’t seen significant foreign inflows over the past year and a half. If the funds raised in Yen had been invested heavily in Indian markets, the unwinding could have led to major disruptions. However, because the majority of these investments were in the highly liquid US market, the impact was contained, and Indian markets were spared from any serious upheaval.

The Role of Domestic and Foreign Funds in India

The situation presents a silver lining for Indian markets. The lack of heavy foreign investment over the last 18 months has meant that domestic investors have been the main support for the market. This natural cycle, where foreign and domestic funds are not moving in sync, could be beneficial in the long run. It suggests that when domestic support weakens, foreign investments might step in, creating a complementary relationship between the two. This relay race-like scenario could provide a steady flow of liquidity to the Indian markets, ensuring stability and growth.

The Importance of Liquidity in Market Stability

Liquidity is a crucial factor in driving markets up or down. The recent events demonstrate that having a balance between domestic and foreign liquidity can be very advantageous. When one source of funds recedes, the other can take over, preventing sharp declines and supporting market growth. This complementary relationship between domestic and foreign investments could become a key strength for the Indian market, helping it navigate through global financial shifts more smoothly.

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