Spillover Effects of the Yen Carry Trade on the Indian Economy

Abstract

This study examines the effects of carry trade activity, international monetary factors, and global risk conditions on foreign portfolio investment flows into India. Because of Japan's consistently low interest rates, which can make emerging markets susceptible to external financial shocks, the Japanese yen has long been used as a funding currency. The analysis examines whether interest rate differences, changes in the USD/JPY exchange rate, and global risk indicators are consistently linked to portfolio inflows into India's debt and equity markets using time-series regressions with heteroskedasticity-robust standard errors. A monthly time series from January 2007 to December 2025 is used for this purpose. The findings show that FPI flows cannot be adequately explained by long-term interest rate differences alone. Instead, the main ways that spillovers occur are through changes in the value of the yen and the general perception of risk around the world. It has been discovered that equity flows are more unpredictable and susceptible to worldwide shocks than debt flows, especially when uncertainty is high. Overall, the results emphasize how portfolio capital flows into India are driven by external factors and stress how crucial international financial conditions are in spreading the effects of the yen carry trade.