US Bond Yields Rise, Potential Impact on Domestic Equities Markets

Rising US Bond Yields Pose Fresh Risk for Indian Equities

A sharp increase in US bond yields has emerged as a new risk factor for Indian equities. The higher yields are likely to trigger foreign outflows from Indian equities, weaken the rupee, and compress equity valuations. The yield on the benchmark 10-year US Treasury is hovering around 4.51 percent levels, driven by a mix of sticky US inflation, resilient economic growth, rising crude oil prices, uncertainty surrounding the new Federal Reserve chair, and a broader global bond market rout.

For Indian markets, one of the biggest concerns is the narrowing gap between US and Indian bond yields. The spread between the US 10-year Treasury and India's 10-year government bond has compressed to around 244 basis points, which is far below the historical average of 450 basis points. This compression of the yield differential will reduce the attractiveness of Indian debt for global investors, impact foreign inflows, and add pressure on the rupee.

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Rising US yields could also encourage foreign portfolio investors to reallocate capital toward developed markets, especially if higher US yields continue to offer relatively safer returns. This comes at a time when foreign investors have already been cautious on emerging markets amid global geopolitical uncertainty. Higher global discount rates may weigh on equity valuations, particularly in long-duration sectors such as consumer, technology, and internet businesses, where earnings expectations are more dependent on future growth.

The impact on valuations is expected to unfold gradually over the next three to four quarters. While resilient US financial conditions have so far limited broader economic stress, any prolonged rise in yields could keep emerging market equities, including India, under pressure.