Yesterday's unexpected and heavy sell-off by Foreign Institutional Investors (FIIs), amounting to over ₹10,000 crore, raised eyebrows across the markets. At first glance, there seemed to be no immediate domestic trigger. However, a closer look at global bond markets, particularly Japan, provides some clues.
One of the key factors behind this sudden move appears to be the rise in Japanese government bond yields. These yields jumped due to a shift in monetary policy by the Bank of Japan, which holds around 55% of all Japanese government bonds. The central bank has begun a process of tapering its balance sheet — a move known as Quantitative Tightening (QT). Under this strategy, the Bank of Japan is reducing its bond holdings by around $20 billion every month.
This reduction in demand for long-dated Japanese bonds, coupled with an oversupply, caused yields to spike. When bond yields rise sharply, especially in low-interest economies like Japan, it impacts global capital flows. A key consequence is the strengthening of the Japanese yen and a rise in interest rates, which directly affects what is known as the “carry trade.”
In a typical carry trade, investors borrow money from low-yield economies like Japan and invest in higher-yielding assets elsewhere, including emerging markets like India. When Japanese yields rise, the cost of borrowing in yen increases, making the carry trade less profitable. This forces investors to unwind their positions — selling off assets in target markets and converting back to yen.
It is likely that yesterday's FII sell-off was triggered by this exact phenomenon. As Japanese interest rates rose, some funds that had borrowed in yen and invested in Indian assets may have started exiting to reduce risk or rebalance exposure. This wasn't driven by any domestic fundamental issue but by shifts in global yield dynamics.
Disclaimer:
The information in this article is for educational and informational purposes only. It should not be considered financial or investment advice. Readers are advised to consult with a qualified financial advisor before making any investment decisions.
