The boardrooms of India’s premier financial institutions and infrastructure giants are in for a rude awakening. And this time around, it’s not the falling rupee that’s pinching. It’s the rise of the Japanese yen, along with the volatility in other currencies, that’s making companies nervous.
For years, the Japanese yen was treated as an endless vault of virtually free money — a currency locked in a terminal, one-way slide that made hedging an afterthought rather than a survival shield. That notion is now developing cracks, as a historic intervention by the Japanese government has triggered a sharp surge in the yen against the US dollar.
For corporate treasuries that gorged on ultra-low-cost Japanese yen-denominated liabilities, this structural reversal has immediately translated into a brutal spike in hedging costs. What chief financial officers long projected as a predictable, negligible expense is rapidly turning into an aggressive, margin-eating liability as forward premiums shift erratically.
This is happening amid a stabilising rupee. Over the last month, the Indian currency has traded relatively stable around the 95-96 range against the US dollar.
The end of the endless vault
For years, institutions like Power Finance Corporation (PFC), REC Ltd, and the Indian Renewable Energy Development Agency (IREDA) baked a simple assumption into their long-term financial models – that the yen’s weakness was permanent.
That thesis unravelled when the US Treasury joined forces with Japan’s Ministry of Finance to deploy billions in coordinated market interventions to rescue the beleaguered yen from multi-decade lows. This rare bilateral defence dragged cross-currency dynamics like JPY/INR into uncharted volatility, leaving corporate balance sheets exposed to a sudden, aggressive repricing of risk.
The immediate impact of this is quite visible.
Take the case of Indian Railway Finance Corporation (IRFC). In Q1 FY27, IRFC reported other income of INR130 crore, a stark contrast to a loss of INR7 crore in the previous quarter. In the one-year period ending June 2026, the yen depreciated over 15% against the USD, but it rebounded more than 5% against the greenback in a matter of weeks, reacting to the joint US-Japan market defence.
Addressing how the company is navigating yen volatility, Manoj Kumar Dubey, chairman, managing director and chief executive officer, IRFC, noted: “That is a normal fluctuation in the currency. So, you can say that we are lucky enough. We have taken some amount in the yen that is part for funding ongoing metro disbursement…so had it been a loss, it would have been passed on to them. But since it resulted in a kind of profit…it came in our favour. So that is the income that is being shown. Last year, in fact, last quarter, we took a hit of INR7 crore. This year, rupee appreciated and yen depreciated, so that benefit has come out to the company.”
But in Q2, yen is likely to end with sharp appreciation and probably start the cycle of steady up-move in coming quarters, opening gates of forex losses as broader macroeconomic fundamentals shift.
On paper, headline disclosures suggest that risk is managed through mandatory hedging programmes. Yet, a closer look reveals an impending squeeze where the mechanics of massive central bank intervention are making risk mitigation exponentially more expensive.
The Reserve Bank of India (RBI) rules mandating minimum hedging requirements for external commercial borrowings (ECBs) prevent any system-wide losses, but the cost of mitigating currency risk has gone up. Indian companies are reporting significant forex losses as hedging costs and currency volatility shoot up.
For context,this is the first joint yen-buying forex intervention between the US and Japan since 1998 and the first since the 2011 Tohoku earthquake wherein the US, Japan and other G7 countries intervened in the JPY FX markets.
“Historical episodes of joint JPY (Japanese yen) intervention show that these events have typically taken place around key turning points in USD/JPY… Overall, while we think that the joint intervention is certainly historic and significant, and could play an important role in the short term in clearing out yen shorts, the fundamentals (like low real interest rates) likely still need to change for a more durable move lower in USD/JPY,” says Michael Wan, senior currency analyst at MUFG Bank.
In June 1998, USD/JPY fell sharply from 146 to 136 within a few days, helped by joint forex intervention, but it took at least two more months after that and shifts in the underlying dynamics of the Asian Financial Crisis before USD/JPY’s longer-term trend broke.
In another episode during the joint intervention from February 1995, USD/JPY fell sharply from 100 all the way down to 80, before eventually rising to 100 to break its trend lower.
The broader forex squeeze
Apart from potential yen exposures, several Indian companies have experienced severe forex losses in other currencies, laying bare the reality that complete hedging is neither always possible nor cheap. Hedging costs themselves can become a primary driver of net losses as reflected in Q1 FY27 results and earnings calls of several companies over the past couple of weeks.
Example #1: Tyre manufacturer CEAT faced a severe bottom line impact driven partly by a nearly INR48 crore foreign-exchange loss. This loss primarily stemmed from the depreciation of the Sri Lankan rupee against dollar-denominated debt held by the company’s overseas subsidiary, heavily impacting consolidated profitability despite strong top line growth.
“…in Sri Lanka, the Lankan rupee went down, that is from LKR310, LKR315 to USD1 (on March 31) to around LKR335 to USD1 (on June 30). That came as a currency impact for the quarter… on the standalone parent company… this is USD80 million,” said Arnab Banerjee, managing director and CEO, CEAT.
“In the normal course, it wouldn’t have come as a loss. For example, we have a much larger proportion exposure of currency in our CEAT India books. You would not see that kind of an impact because these are all hedged. But in Sri Lanka, the currency of Lankan rupee could not be hedged against the dollar in the absence of any mechanism to do so,” Banerjee explained.
“We are constantly studying to find out how to make sure that this is handled in the future,” he added.
Example #2: Syngene International, the contract research and manufacturing (CDMO) major, recorded a sizeable INR50 crore forex hedging loss during the quarter. The company management noted that this hedging impact, alongside slower biologics orders and one-off employee termination costs, turned the quarter into a net loss position, prompting a revision in their full-year guidance.
“Operating Ebitda for the quarter stood at INR91 crore with an Ebitda margin of 12%. The margin performance reflected the impact of lower revenues together with foreign exchange hedge loss of INR50 crore during the quarter,” said Siddharth Mittal, managing director and CEO, Syngene International.
Example #3: KPIT Technologies reported a specific foreign exchange loss of around INR16 crore outside of its Ebitda calculations for Q1 FY27. This currency hit, coupled with higher depreciation and finance costs, weighed significantly on the company’s bottom line, contributing to a sharper contraction in net profit compared to its operating margins.
“And the profit, basically the PAT, got impacted on two other accounts, one which was the forex loss and also share of loss from Qorix, which, again, in some way was an impact of the postponement of certain revenues, specifically in the Europe region and that had an impact on the PAT,” said Kishor Patil, CEO and managing director, KPIT Technologies.
The final cut
When the yen appreciates sharply, it increases the rupee-equivalent value of outstanding foreign currency principal liabilities on the balance sheet, triggering non-cash mark-to-market translation adjustments and increasing hedging costs.
The interest rate gap between the US and Japan remains the fundamental engine of past yen weakness, but it is narrowing. While US interest rates remain elevated, the Bank of Japan (BoJ) has kept its main rate low, though inflation near 2% leaves real rates negative. To arrest the yen’s slide, the BoJ faces pressure to raise rates aggressively, which would aggregate risks for Indian borrowers through soaring hedging costs.
“For the BoJ, we retain our call of 50-bp hike in CY26E, implying another 25-bp hike in CY26E and one more in CY27E. If the BoJ deviates from the expected rate hike path as underlying inflation upside persists and the JPY is increasingly coming under exogenous shocks, JGB (Japan government bond)yields are likely to firm up further,” Elara Securities noted on August 5.
With BoJ firmly on a path toward normalisation and global forex markets gripped by structural volatility, the era of effortless foreign borrowing seems officially over. As Q2 and the rest of FY27 unfold, corporate India’s ability to protect its margins will depend entirely on how swiftly treasuries adapt to a newly empowered yen.
aniltikotekar4sme.com 