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2026.03.26
Japanese companies operating in India face a unique currency risk that other foreign companies don't: a double currency-fluctuation risk running "yen to dollar to rupee." Because many international transactions in India are denominated in US dollars, Japanese companies bear two stages of currency exposure — converting Japanese yen to US dollars, and then US dollars to Indian rupees.
In 2025, the Indian rupee became one of the worst-performing currencies in Asia, falling about 5% against the US dollar. Cumulatively from August 2024 to mid-2026, the depreciation has exceeded 10%. Meanwhile, the Japanese yen has also seen significant swings against the dollar, so revenue from the Indian operations of Japanese food companies is exposed to this dual impact of currency movements. SBI Funds Management forecasts the rupee at around 92 rupees/USD in 2026, suggesting a continued gradual depreciation trend. This article analyzes the structure of this dual currency risk and provides a comprehensive explanation of practical hedging strategies for Japanese companies.
India is a structural current-account-deficit country, and it finances this deficit with capital inflows from abroad (FDI, portfolio investment, and remittances). Because of this, capital outflows accelerate during global risk-off phases, increasing downward pressure on the rupee. International price swings in edible oils and pulses — food raw materials with high import dependence — also affect the rupee's movements.
The Reserve Bank of India (RBI) has effectively adopted a "managed float" system, intervening in the spot and forward markets to curb sharp swings in the rupee. RBI's foreign exchange reserves have reached about $650 billion (as of the end of 2025), giving it ample capacity to defend the rupee in the short term. That said, RBI is willing to tolerate gradual adjustment in line with fundamentals, and does not aim to completely stop the rupee's depreciation trend.
The inflation differential between Japan's low inflation (1 to 2%) and India's relatively high inflation (4 to 6%) is a factor that depreciates the rupee against the yen over the long term. Based on purchasing power parity (PPP) theory, currencies with higher inflation rates tend to depreciate over the long term, and the rupee's rate against the yen could continue a depreciation trend of roughly 2 to 4% per year.
India's foreign exchange transactions are regulated by RBI under FEMA (the Foreign Exchange Management Act, 1999). The basic framework Japanese companies need to understand when conducting foreign exchange transactions in India is as follows.
FEMA strictly distinguishes between current account transactions and capital account transactions. While current account transactions such as trade payments, service fees, royalties, and technical assistance fees can be conducted relatively freely, capital account transactions such as equity investment, lending, and real estate purchases are subject to RBI's prior approval or reporting obligations.
Dividend remittances to the Japanese head office can be made freely, after deducting the prescribed tax (the dividend distribution tax has been abolished and taxation is now at the shareholder level), as long as they stay within the distributable profit allowed under company law. Remittances of royalties and technical assistance fees are made either through RBI's automatic approval route (within a certain cap) or the RBI prior-approval route. Local partners It is important to clearly agree, at the time of contracting, on the method and timing of profit remittances in a joint venture with a local partner.
This is the most basic and widely used hedging method. It is a contract to exchange currency at a predetermined rate (the forward rate) on a specific future date. For example, if a dividend remittance from India to Japan will be made in six months, the exchange rate six months out can be locked in now. The forward rate is set by reflecting the interest rate differential (between the yen and the rupee) on top of the spot rate. Because interest rates in India are higher than in Japan, the forward rate for the rupee is normally set weaker than the spot rate (i.e., a cheaper rupee).
This method involves paying a premium (option fee) to purchase the "right" to exchange currency at a specific rate on a specific future date. If the rate moves favorably, you can let the option lapse and trade at the market rate; if it moves unfavorably, you can exercise the option and trade at the rate fixed in advance. Unlike a forward, its feature is the flexibility to capture upside from favorable currency moves while limiting losses. However, since it involves a premium cost, comparing hedging costs is necessary.
This is an application of currency options, combining the purchase of a put option (to defend a floor) with the sale of a call option (giving up any gain above a cap). An upper rate and a lower rate are set, and risk is managed within that range. Because the premium earned from selling the call offsets the cost of buying the put, hedging can be done at zero or low cost. This is a method growing in popularity among Indian corporate treasury departments as well, and it is well suited to Japanese companies too.
This is a long-term hedging method that exchanges principal and interest payments denominated in different currencies. If an Indian subsidiary has received a yen-denominated intercompany loan, a cross-currency swap can hedge both currency risk and interest rate risk at the same time. It is typically suited to medium- to long-term exposures of two years or more.
This method reduces risk through the business structure itself, without using financial instruments. Concretely, this includes matching income and expenses in India in the same currency (rupees), raising the proportion of raw materials sourced within India, and balancing exports against imports. For food companies, expanding local raw material sourcing (a local-production-for-local-consumption model) contributes to both reducing currency risk and improving cost efficiency.
RBI is proceeding with deregulation to allow Authorized Dealers (ADs) to trade NDDCs (Non-Deliverable Derivative Contracts) domestically in rupees. Previously, NDFs (Non-Deliverable Forwards) were traded only in offshore markets such as Singapore and Dubai, and the price divergence between onshore and offshore markets had been a problem. Allowing NDDCs to be traded domestically is expected to narrow this price gap and reduce companies' hedging costs.
RBI is simplifying regulations to promote corporate hedging activity. Requirements for balance management and position reporting have been eased, allowing companies to manage their hedge portfolios more flexibly. In particular, the development of simple forward-contract products for small and medium-sized enterprises is being encouraged.
Industry best practice recommends hedging 70–90% a portion of foreign currency exposure. Hedging 100% makes costs excessive, while hedging nothing leaves excessive risk exposure, so setting a balanced hedge ratio is important. The specific ratio should be determined based on the business's currency sensitivity (how much a 1% currency move affects profit).
For short-term hedges (1 to 3 months), forward contracts are the most cost-efficient. For medium-term hedges (3 to 12 months), a collar strategy or a combination of options is suitable. For long-term hedges (1 to 5 years), using cross-currency swaps together with natural hedging is recommended.
The cost of hedging the Indian rupee, reflecting the interest rate differential between Japan and India, runs roughly 4 to 6% annually (the discount of the forward rate from the spot rate). It's important to understand that this "hedging cost" is essentially an adjustment for the interest rate differential, not a pure cost. That said, it does act as a cost factor for cash flow, so it needs to be built into the business plan.
The following approaches are effective against the double risk of yen-to-dollar-to-rupee unique to Japanese companies.
Approach 1: Direct JPY/INR Hedging— This method involves entering a JPY/INR forward contract in the Tokyo market. Liquidity is limited, but it has the advantage of covering the double currency risk with a single hedge.
Approach 2: Split Hedging— This method hedges JPY/USD and USD/INR separately. Each currency pair has high liquidity, allowing more precise hedging, but it requires managing two separate hedge positions.
Approach 3: Maximizing Natural Hedging— By expanding local sourcing and local production in India and matching rupee-denominated income with rupee-denominated expenses, this method reduces the currency exposure itself. It is the most cost-efficient strategy over the long term.
USD/INR is forecast to trade in the range of 85 to 92 rupees during 2026. The main drivers of movement are the normalization of US interest rate policy and India's solid economic growth. The possibility of the rupee strengthening on progress in US-India trade negotiations has also been noted.
Risks of a Sharp Rupee Decline include an intensification of global geopolitical risk, a sharp spike in oil prices (India being a net energy importer), and large-scale capital outflows by FPIs (foreign portfolio investors). Risks of a Sharp Rupee Rally could arise from dollar weakness caused by a US recession, an improvement in India's trade balance, or aggressive rate hikes by RBI.
Cases of Failed India Operations include cases where underestimating currency risk threw off profit plans. It is necessary to run stress tests based on multiple scenarios and formulate a hedging strategy that allows the business to survive even in the worst case.
The currency risk Japanese food companies face in India has industry-specific aspects. First is the combined effect of commodity price risk in food raw materials and currency risk. For imported raw materials, since international commodity market price swings and currency movements affect the business at the same time, integrated management of commodity hedging and currency hedging is required.
Second, the Indian food market is highly price-sensitive, making it difficult to pass all currency movements through to the selling price. This is especially true for imported food that has obtained FSSAI certification premium certification, where currency movements become a direct factor in competitiveness against domestic products in price competition.
Third, Cultural differences between Japan and India also affect the practical side of currency management. In foreign exchange dealings with Indian banks and in sharing currency policy with the local finance team, designing a clear decision-making framework and delegation of authority is important.
In India, where many international transactions are denominated in US dollars, Japanese companies bear two stages of currency risk — from yen to dollar, and from dollar to rupee. Because both the Japanese yen and the Indian rupee fluctuate, the earnings of India operations are hit by a double impact from currency movements. This is a challenge unique to Japanese companies that other foreign companies don't face.
Because India is a structural current-account-deficit country that finances the deficit with capital inflows from abroad, capital outflows accelerate during global risk-off phases, increasing downward pressure on the rupee. RBI curbs sharp swings through market intervention but tolerates gradual adjustment. The relative inflation differential with Japan is also a factor depreciating the rupee against the yen over the long term.
These include forward contracts, which lock in a future rate; currency options, which limit risk by purchasing a right; collar strategies, which combine giving up upside with defending a floor; cross-currency swaps, which exchange medium- to long-term principal and interest; and natural hedging, which reduces risk through the business structure without using financial instruments. It is recommended to use them differently depending on the tenor and purpose.
Natural hedging reduces the currency exposure itself by matching income and expenses in India in the same currency, rupees. For food companies, a local-production-for-local-consumption model — expanding local raw material sourcing — contributes to both reducing currency risk and improving cost efficiency. It is considered the most cost-efficient strategy over the long term.
Since hedging 100% makes costs excessive and hedging nothing leaves excessive risk exposure, the common best practice is to hedge a certain proportion of foreign currency exposure. The specific ratio should be determined based on the business's currency sensitivity, such as how much currency movement affects profit. It's also important to understand that the hedging cost reflects the interest rate differential between Japan and India.
The starting point is considered to be conducting a currency sensitivity analysis before market entry and formulating a currency risk policy at the management level. On top of that, it is recommended to build a multi-layered defense combining forwards, options, and natural hedging, and to regularly review and adjust hedge positions. It is important to position currency strategy at the core of the business plan.
In an environment where the volatility of the Indian rupee overlaps with the instability of the Japanese yen, currency risk management is one of the most critical issues determining the profitability of an India operation. It is essential to position currency strategy at the core of the business plan, not as a "nice to have" side element.
Recommended actions include conducting a currency sensitivity analysis before market entry, formulating a currency risk policy at the board level, building multi-layered defense by combining hedging methods (forwards plus options plus natural hedging), reviewing and adjusting hedge positions every quarter, and strengthening the capabilities of the local finance team. Properly managing currency risk lays the groundwork for converting India's enormous growth opportunity into profit.
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