Japanese FPIs own shares worth Rs 2.06 lakh crore in India

Foreign portfolio investors (FPIs) coming from Japan have an exposure worth Rs 2.06 lakh crore in the Indian stock market, accounting for a little less than three percent of the total FPI exposure in the stock market

Foreign portfolio investors (FPIs) coming from Japan have an exposure worth Rs 2.06 lakh crore in the Indian stock market, accounting for a little less than three percent of the total FPI exposure in the Indian equities.

Data from the National Securities Depository Limited (NSDL) shows that the total assets under custody (AUC) – inclusive of equity, debt and hybrid -- held by Japanese FPIs was pegged at Rs 2.17 lakh crore, of which 2.06 lakh crore was in equities in June.

In terms of the total AUC – across asset classes -- held by FPIs coming from different countries, Japan accounts for the ninth largest.

More importantly, Japanese FPIs account for less than 3 percent – 2.88 percent to be precise -- of the total equity AUC held by FPIs in the country. The total equity AUC is pegged at Rs 71.5 lakh crore, per data from NSDL.

If only the equity exposure is taken into account, then Japanese FPIs are the eighth largest set of foreign investors investing in the Indian stock market.

This assume significance as global markets, including the India markets, have turned jittery over the possible impact of a reverse yen carry trade after the Bank of Japan raised its benchmark rate last week on Wednesday.

Yen carry trade refers to a strategy that involves borrowing money in a currency that has a low-interest rate – yen, in this case -- and investing it in asset classes that offer a higher rate of return – Indian equities, for instance.

While this strategy is popular with forex traders, it is also used by fund managers who deal in equities and commodities, and bonds.

Also Read: What is carry trade and how does Bank of Japan’s rate hike affect it?

Market participants believe that while Indian markets will also be impacted due to the global concerns, the returns offered by Indian markets along with the strong economic outlook will help counter the impact to some extent and one could see FPI flows stabilise soon.

“Though some near-term impact on FPI flows due to unwinding of yen carry trade cannot be ruled out, we do believe that the risk-reward still favours Indian equites post the rate hike by the Bank of Japan,” says Manish Chowdhury, Head of Research, StoxBox.

“The corporate earnings growth trajectory in India is still strong and is likely to offset the risks associated with higher cost of funds… We believe that the lower bond yields should keep the FPI flows supported for emerging economies such as India in the medium term,” he adds.

In a similar context, Nitin Agarwal, CEO, Torus ORO PMS says that, based on the recent data, Japanese FPI investment is not significant in Indian equities, and thus there would not be any major negative, apart from the general risk-off trade globally.

“The yen carry trade was a classic trade specially post Covid where yen borrowings at lowest interest rates were utilised to invest in risky assets. The benefit was three fold – better gains on risky assets, savings on interest cost and borrowing in a currency which is depreciating leading to lower liability... Now, we have seen in the past, any unwinding or change of course in interest rates, leads to re-adjustment across asset classes… We believe that this unwinding will lead to a risk-off situation globally, which will be negative for equities in general,” says Agarwal.

Also Read: Grim milestones flash across Asian stocks as risk-off takes hold

Meanwhile, the top five countries in terms of equity AUC in the Indian stock market are US (Rs 30.17 lakh crore), Singapore (Rs 5.25 lakh crore), Luxembourg (Rs 5.21 lakh crore), Ireland (Rs 4.20 lakh crore) and Mauritius (Rs 3.78 lakh crore).

Apart from Japan, countries like UK, Norway, Canada and France also feature in the list of top 10 jurisdictions from which India sees the maximum quantum of FPI flows.

“The strengthening yen has increased the real borrowing cost for global investors, leading to the unwinding of positions by FPIs who have funded their investments by borrowing in Japanese yen,” says Yashovardhan Khemka, Senior Manager - Research & Analytics at Abans Holdings.

“Conversely, if the US remains aggressive in rate cuts, it may further reduce the interest rate differential between the Japanese yen and the US dollar, leading to further unwinding by investors,” adds Khemka.

To be sure, there are FPIs from other countries as well that borrow yen from Japan and invest in equities globally, including India, and those funds could also be impacted in the new scenario with Japan increasing interest rates.

Both, the Sensex and Nifty, were trading nearly 3 percent lower around 11:45am. Further, more than 3,200 stocks on BSE were in the red, as against less than 600 gainers.