The Yen Problem: How India’s Railways and Capex Could Be Impacted

The "Yen" Conundrum: How India's Railway Sector Faces a Financial Crossroad

Between 2021 and 2024, the Japanese Yen depreciated significantly, losing at least one-third of its value against the US dollar. By mid-2024, the Yen hit a 34-year low against the dollar, marking a dramatic shift in its value. This decline has significant implications for India's economy, particularly for sectors with substantial exposure to Yen-denominated loans.

India's exposure to Yen-denominated loans has doubled since 2015, increasing from USD 19 billion in March 2015 to USD 38.5 billion by the end of March 2024, according to NDTV Profit’s analysis based on Reserve Bank of India (RBI) data. This surge in Yen-based borrowing is driven by the currency's depreciation and the extremely low interest rates offered by Japanese lenders.

For Indian companies and the government, borrowing in Yen has been particularly attractive. The sharp decline of the Yen against the Indian rupee – an 18 per cent increase in the rupee's value against the Yen since early 2023 – had made Yen loans even more appealing by mid-2024. For example, an Indian company that borrowed 1 billion Yen at the beginning of 2023 would have faced a cost of Rs 67 crores based on the exchange rate at that time. With the rupee's appreciation, the repayment cost would have dropped to Rs 55 crores, saving the company Rs 12 crores- about 20 per cent.

Moreover, the interest rates on Yen loans are exceptionally low, often below 1 per cent, compared to a 5 per cent interest rate on USD loans. This stark contrast further incentivizes borrowing in Yen, as it significantly reduces the cost of servicing the debt.

However, the widespread adoption of Yen loans is now bringing financial challenges. The Yen Carry Trade – borrowing in Yen at low interest rates and investing in higher-yielding assets – is leading to increased debt servicing costs for Indian companies that have taken long-term Yen loans. The risk has become more pronounced as the Yen has started appreciating, which is currently increasing the cost of these loans.

India is the largest recipient of Japanese Official Development Assistance (ODA) loans, used for various infrastructure projects, including the Delhi Metro and India's first bullet train. These loans, which come with interest rates ranging from 0.1 per cent to 1.8 per cent, are contingent upon importing Japanese technology and metal. At least 25 per cent of railway projects are tied to these procurement mandates. A rising Yen would increase the cost of these imports, exacerbating India's trade deficit with Japan, as India is a net importer from Japan.

Major Indian companies, including NTPC, REC, JSW Steel, PFC, and HUDCO, have raised over Rs 11,000 crore in Yen-denominated loans over the past year. The railway sector, with its significant capital expenditure (capex) requirements, will also be impacted. As the Yen appreciates, the cost of capex for railway projects is likely to rise, straining budgets and potentially delaying projects.

In summary, while Yen loans have offered Indian companies and the government a cost-effective borrowing option in the short term, the potential appreciation of the Yen poses a significant risk. This is particularly true for the railway sector, where increased costs could hinder infrastructure development and strain financial resources. The "Yen" problem is a financial crossroad that requires careful navigation to mitigate future economic challenges.

Disclaimer: The article is for informational purposes only and not investment advice.