Emerging Market Rate Cuts Accelerate: Brazil, India, and the New Carry Trade
bIAnk AI Research · January 2026 · 6 min
Major emerging economies are cutting rates aggressively, creating attractive yield differentials and reviving the EM carry trade with direct implications for cross-border capital flows.
Brazil's central bank has cut the Selic rate to 10.75%, down from the 13.75% peak, while India's RBI has reduced the repo rate to 5.75%. These moves are part of a broader emerging market easing cycle that is reshaping global capital allocation.
The emerging market rate-cutting cycle is more advanced than in developed markets, with Latin American central banks having begun easing a full year before the ECB. This early mover advantage has attracted significant portfolio inflows, compressing EM sovereign spreads.
For M&A activity, lower EM rates are reducing the cost of local currency financing, making domestic acquisitions more attractive. Brazil in particular has seen a resurgence of PE-backed deals as the Selic comes down from crisis-era levels.
The carry trade—borrowing in low-rate currencies to invest in higher-yielding EM assets—has returned with force. Japanese yen and Swiss franc funding is flowing into Brazilian real and Indian rupee assets, increasing both liquidity and volatility.
Investors should be cautious about FX risk. While rate differentials are attractive, EM currencies remain vulnerable to sudden US dollar strength or geopolitical shocks. Hedging costs eat into carry returns, making unhedged exposure a concentrated bet.
Key takeaways
- Brazil Selic at 10.75% (down from 13.75%), India repo at 5.75%—EM easing cycle leads DM
- EM sovereign spreads compressing as portfolio inflows accelerate
- Lower EM rates reviving local-currency PE deal activity, especially in Brazil
- Carry trade resurgence brings liquidity but heightens FX volatility risks