Japan raises 1.25% interest rate will impact India, Rupee and foreign flows
By Anjali Sharma
WASHINGTON – The Bank of Japan (BOJ) on Friday has raised its benchmark interest rate by 25 basis points to 1.25%, taking borrowing costs to their highest level in 31 years, as per media reports.
The decision, taken by a 7-2 vote, was widely expected by financial markets and marks another step away from Japan’s decades-long ultra-loose monetary policy.
Bank of Japan raised benchmark interest rate to 1.25%, raising concerns over global capital flows, yen carry trades and emerging markets
The move came as Japan grapples with inflation pressures linked to higher energy and import costs, while the yen remains under pressure.
The US dollar was trading around 155 yen.
The BOJ’s decision also comes shortly after the US Federal Reserve raised its policy rate, keeping global monetary policy firmly in focus.
The biggest potential impact on India could come through global capital flows.
The yen’s very low interest rates made it an important funding currency for the yen carry trade.
Investors could borrow cheaply in yen and invest in higher-yielding assets in countries such as India. As Japanese interest rates rise, the cost of maintaining such trades increases.
A stronger or more volatile yen can therefore encourage investors to reduce leveraged positions and repatriate some funds to Japan.
Media reported that the recent yen rally was already prompting investors to reconsider carry trades ahead of the BOJ decision.
It could mean greater volatility in foreign portfolio flows, particularly if investors simultaneously reassess positions in emerging markets.
The impact on the Indian rupee is likely to depend on how global investors respond to the combination of BOJ tightening, US rates and India’s own interest-rate outlook.
If global investors move money towards Japanese assets or unwind carry trades, demand for emerging-market currencies could weaken.
This could add pressure on the rupee, particularly at a time when India is already dealing with elevated oil prices.
The immediate impact should not be overstated.
The BOJ’s move was largely anticipated by markets, and the yen actually weakened after the announcement because investors viewed the decision and accompanying signals as less hawkish than some had expected.
The BOJ’s decision does not directly change Indian loan or deposit rates.
The RBI sets monetary policy based on India’s domestic inflation, growth, liquidity and financial conditions.
The indirect effect could come through the rupee and imported inflation. If the rupee weakens significantly against the dollar, imported commodities, particularly crude oil, become more expensive in rupee terms.
Markets will closely watch Governor Kazuo Ueda’s guidance and subsequent economic data for clues on future hikes.
Media reported expectations for the BOJ policy rate to eventually move higher, although the timing and pace remain uncertain.
