Image Credits - Reuters
Global markets experienced significant volatility on Monday as Japan’s Nikkei index plummeted over 12%, triggering a ripple effect across Asia. The key Indian indices, Nifty and Sensex, fell around 3% each in intraday trading. Korean markets also suffered, plunging by 10%, and U.S. futures indicated a negative start for American markets.
Factors Behind the Crash
Several factors contributed to the market crash. In addition to negative economic data from the U.S. and geopolitical concerns in the Middle East, the unwinding of the Yen carry trade in Japan played a significant role. The Bank of Japan’s decision to hike interest rates marked a potential end to the lucrative Yen carry trade, where investors borrowed money in Yen at low interest rates and invested in higher-yielding assets globally. This trade, estimated to be worth $4 trillion, had flourished for 30 years under Japan’s zero interest rate policy. However, with rates now at approximately 0.25%, investors are panicking.
Rumours of a hedge fund collapse in Japan, coupled with the Yen appreciating by 7% in just three days, added to the turmoil. The Yen’s recent rally, which saw it recover 10% in recent weeks and trade closer to 146 per dollar, has also raised concerns about the profitability of Japanese exporters.
Riya Oswal Bafna, Co-Fund Manager at Purnartha PMS, noted that the panic among global traders, who have relied on the Yen’s low rates for arbitrage opportunities, led to widespread selling. The strengthening Yen further eroded earnings for Japanese exporters, prompting foreign investors to offload Japanese stocks.
Impact on Indian Markets
While the fall in Indian markets was relatively less severe than in global counterparts, questions remain about their resilience. Riya Oswal Bafna explained that U.S. dollar-denominated debt accounts for 53.8% of India’s external debt, followed by Indian rupee-denominated debt at 31.5%, and Yen at 5.8%. The Reserve Bank of India (RBI) reported India’s external debt at $663.8 billion at the end of March 2024, an increase of $39.7 billion from the previous year. Excluding valuation effects, the increase would have been $48.4 billion.
The depreciation of the Yen has led to a rise in Yen-denominated foreign loans, significantly impacting India’s external borrowing. The RBI noted that the valuation effect, due to the dollar’s appreciation against major global currencies, accounted for an $8.7 billion difference.