Global markets crash: What is carry trade and how does it impact yen and India?

The BoJ raised its short-term policy rate from -0.1% to between 0 and 0.1%. Experts believe the move is expected to have an adverse impact on carry trade.

Updated on: Aug 5, 2024, 13:23:52 IST

By HT News Desk

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On July 31, the BoJ announced that it was raising its short-term policy rate from -0.1 per cent to between 0 and 0.1 per cent. Experts believe that the move is expected to have an adverse impact on carry trade.

An employee of the foreign exchange trading company Gaitame.com works in front of monitors displaying the Japanese yen exchange rate against the US dollar. (Reuters)

Japanese stocks collapsed in their biggest single day rout since the 1987 Black Monday selloff. The Nikkei share average shed 12.4% and yen rallied to 7-month highs versus the dollar. Japan's banking stocks led the rout, which pushed the Nikkei into bear market territory given its 27% drop from a July 11 peak of 42,426.77. The index had wiped out 113 trillion yen ($792.32 billion) of that peak market value.

What is carry trade?

Carry trade is a strategy that involves borrowing money in a currency which has a low-interest rate and investing it in asset classes that give a higher rate of return. The strategy is not only popular among forex traders but also used by fund managers who deal in equities and commodities.

Does carry trade apply only to currencies?

No, it is primarily used with forex but carry trade is not limited to currencies only. Investors can employ carry trade by borrowing money in a currency with lower interest rates and deploying the capital in various asset classes.

How will Bank of Japan's rate decision impact traders?

Read more: How volatile is Indian stock market? Should you buy, hold or sell?

As borrowing of the yen becomes more expensive due to higher interest rates, traders' profit margin will shrink. Moreover, higher interest rates could attract more foreign inflows into Japan which could further strengthen the currency which in turn could increase losses for the traders.

ABOUT THE AUTHOR
HT News Desk
Follow the latest breaking news, major developments and agenda-setting stories from India and around the world with the newsdesk at Hindustan Times. Operating round the clock, the desk brings together experienced editors, reporters and correspondents to deliver fast, accurate and contextual reporting across subjects that influence public policy, governance, business, society and international affairs. The HT News Desk covers politics, elections, government policies, the economy, business and markets, science and technology, the environment, law and order, infrastructure, education, climate issues and geopolitics, while closely tracking developments across states, institutions and global capitals. The team also leads coverage of major breaking news events, policy announcements, court proceedings, natural disasters, public emergencies and significant international developments. Reports published by the newsdesk are based on information gathered from reporters on the ground, official statements, government agencies, court records, regulatory filings, recognised institutions and other authoritative sources. Stories undergo editorial scrutiny and verification processes to ensure accuracy, fairness and relevance, and are updated as events evolve and additional information becomes available. Whether covering a key political decision in New Delhi, an economic policy shift affecting millions, a landmark court ruling or a major global event, the HT News Desk aims to provide readers with reliable, fact-based journalism that delivers not only the latest developments but also the context and analysis needed to understand their wider implications.Read More

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