Corporate carry trade

Corporate carry trade

The carry trade is often seen as a tool in the hands of buccaneering hedge funds, which borrow cheaply in Japan and then shovel the billions into other markets in the world. But is that the entire story?

In its new World Financial Stability Report, IMF makes a startling claim—that a lot of corporate borrowing in Asia resembles the carry trade. IMF particularly mentions Indian companies in this respect.

“External borrowing by Indian corporations—both non-financial and financial — is increasingly in yen and left largely unhedged," says IMF. The spurt in yen borrowing to take advantage of rock-bottom interest rates in Japan is a symptom of a larger malaise—the overall weakening in financial and credit discipline in India and the rest of Asia.

There is surely no need to panic. Indian balance sheets are still in good shape and leverage is low. But they are fraying at the edges, as the carry-trade style borrowing shows.