Statsguru: Analysing impact of rising US bond yields on Indian stock market

Yields on US 10-year government bonds touched 5 per cent last week, its highest level since 2007. The benchmark US 10-year treasury yield was up over 150 basis points from its 2023 low, though it came down later in the week. Meanwhile, Indian bond yields witnessed a rise of 40 basis points from their low, narrowing the gap between the two (chart 1).

 

Higher yields in developed markets, particularly the US, can put pressure on emerging market central banks to raise interest rates. Indonesia’s central bank raised interest rates in a surprise move earlier this month. The Philippines followed suit on Thursday with a similar hike of 25 basis points . 

India seems relatively better placed according to analysts.

External sector indicators are far more stable in India than was the case in 2013 when yields witnessed a similar spike, and necessitated central bank action. India’s current account deficit, broadly the difference between imports and exports, is lower relative to its economic size than in 2013. The latest figure for June was 1.07 per cent of gross domestic product (GDP), while it was closer to 5 per cent in June 2013 (chart 2).

 

Foreign exchange reserves have declined by around $25 billion from the highest point in 2023, but remain far higher than the levels seen a decade ago. India has enough reserves to pay for nearly 11 months of imports, compared to less than 7 months in early 2013 (charts 3, 4).

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Foreign direct investment (FDI) has taken a hit because of tighter global liquidity conditions. India got over $43 billion worth of FDI in 2019-20 and 2020-21. But it declined to $28 billion in 2022-23 (chart 5).



The cost of capital for corporate entities may pinch in India for now. Besides lower foreign direct investment availability, the highest-rated AAA companies and lower-rated AA companies have seen their cost of borrowings rise by 30-40 basis points already in 2023 (chart 6). 

 

Analysts expect the Reserve Bank of India to hold steady on interest rates for now. But higher oil prices (with its effect on inflation), and further global monetary tightening could pose risks.