In India interest rates are high comparatively to developed economies. Does this allow an arbitrage opportunity? Borrowing in developed country for less interest and investing in bonds or government securities in India for higher interest?
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This is how a typical carry trade works. But I believe the transaction charges are high enough to eat away the carry.
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This is not a likely scenario, because when you borrow in some other country, you will borrow in the currency of that country (lets say dollars) and investing in India will be in Rupees. You might make more interest here but you have a risk of currency depreciation. Now if you try to hedge this risk, then Interest rate Parity comes in where the futures and forward price will factor in the interest rate difference between the 2 countries and leave no scope for hedging such risk.
You can refer the following link on Investopedia to know more on interest rate parity.