Carry trade spurts on the back of corporate tax cut

Apart from inducing demand in the economy, the government's recent measure to reduce the corporate tax rate has found an unintended beneficiary in 'carry trade', which has caused an influx of funds into the Indian securities market in the last one week.

The latest measure, though unrelated, for the niche trade type is expected to strengthen the Indian rupee further which in turn will enhance the total returns of the traders.

A carry trade is conducted to derive benefit out of the interest rate differential along with currency exchange rate.

Ever since quantitative easing has plunged interest rates in the developed world, India has emerged as the key country, which has a high rate compared to the US and Europe. However, the situation on this account has changed since the RBI started to ease the monetary policy.

Now with growth revival measures, carry traders have seen a glimmer of hope that the Indian currency will strengthen, leading to enhanced total returns.

"There is an improvement in the sentiments and flows after the fiscal boost by the government in the form of supply side tax reforms. This essentially has made Indian carry trade lucrative in total return basis," Madhavi Arora, Economist with Edelweiss Securities, told .

"The fiscal bonanza is marginal positive in the near-term from the foreign flows perspective, ceteris paribus, as it reduces the risks of significant INR depreciation, with hopes of improving FPI equity flows," she added.

On Thursday, the Indian rupee strengthened by 16 paise to 70.89 to a USD from its previous close.

Additionally, the FIIs invested Rs 737.17 crore into the Indian equity market.

( With inputs from IANS )