India’s Corporate Tax Reduction Turns Carry Trade Profitable

On Thursday, the carry trade is getting a lift for the Indian rupee. This was after an unexpected $20 billion tax cut by the government.

Recently, the corporate tax reduction announcement happened. It says it has prompted $374 million of inflows into Indian stocks in three days. Moreover, it supported the rupee.

According to UBS Group AG and Kotak Securities Ltd., the inflows are adding to the attractiveness of the currency for carry-trade strategies.

This year, the world’s load of negative debt is almost multiplying to $15 trillion.

Investors are gradually making use of currency-related strategies. These are the ones that let them put pressure on more yields.

In the past month in Asia, the rupee is going long, with borrowed dollars offering the best returns.

Emerging market Asia strategist at UBS, Rohit Arora, stated, “The corporate tax cuts are a response to mounting growth pessimism and should stem Indian equity outflows.”

He also added, “This, in our view, works well enough for the rupee carry trades and lower volatility in the near-term.”

Big Bucks for Higher Rates

Investors are the ones that operate carry trades. This is by borrowing in a lower-yielding currency, for instance, the yen or the euro.

In addition, they are also putting the money into one with higher rates.

In Asia, the Indian sovereign bonds provide the second-highest yields among significant bond markets.

The growing concerns of a global recession still have undermined risk appetite for emerging markets.

According to news reports, this is with returns from purchasing developing nation currencies with dollars easing since July. India is also struggling with its slowest growth in six years.

A currency analyst at Kotak Securities, Anindya Banerjee, said, “Domestic risks abated after multi-pronged measures to boost growth made rupee a preferred carry currency.”

He also indicated that an additional trade-in vogue is shorting the yuan and going long on the rupee. This is to take advantage of the trade pressure risks that the Chinese currency faces.

The current corporate tax reduction in India are more likely to sway the allocation of income than growth or employment.

Companies will now get a greater share of profits from current investments. Meanwhile, the economy stays on the slow path.

At present, there is a very real threat that this would worsen inequality.