2013 redux: Bond yields, inflation, FPI selloffs weigh on Indian markets

Indian equity markets are now facing a situation similar to 2013 when a combination of rising bond yields in the US, an earnings slowdown, and higher inflation in India led to a decline in stock prices during the first half of that year. The correction in stock prices was driven by a selloff by foreign portfolio investors (FPIs). This was accompanied by a falling rupee against major currencies in 2013, much like the trend observed in the past three months. 

“The current macroeconomic setup for the Indian markets is very similar to what we saw during the 2013 taper tantrum episode. Just as in 2011, US bond yields are rising, the dollar is strengthening, the Indian rupee is depreciating, FPIs are net sellers, and earnings growth in India has slowed down,” says Dhananjay Sinha, co-head of research and equity strategy at Systematix Institutional Equities. 

 

The benchmark BSE Sensex declined by 6.5 per cent between January and August 2013, after rising 29 per cent between December 2011 and January 2013. 

The index closed at 18,619.7 at the end of August 2013, compared to 19,895 at the end of January that year, and 15,455 at the end of December 2011. In comparison, the Sensex is down 8.6 per cent since the end of September 2024, reversing two years of double-digit gains for equity investors. 

This rise and subsequent decline in the benchmark index mirrored the pace of FPI inflows into Indian equity markets. FPI inflows began to slow down in March 2013, and they turned net sellers in June 2013. Between June and August 2013, FPIs withdrew a cumulative $3.7 billion from Indian equity markets, compared to net investments of $15 billion between January and May 2013. 

The 2013 FPI selloff was triggered by a rise in US bond yields following the US Federal Reserve’s decision to reduce quantitative easing (QE). QE had been initiated by the US central bank to lower interest rates and provide monetary stimulus after the 2008 global financial crisis. The yield on the 10-year US Treasury rose from a five-month low of 1.67 per cent in April 2013 to 2.78 per cent in August 2013, peaking at 3 per cent in December 2013 before steadily declining over the next two and a half years. 

 

The Indian currency declined nearly 20 per cent against the US greenback in the first eight months of 2013, closing at 65.7 to a dollar at the end of August 2013, compared to 55 per dollar at the end of December 2012. Much like in 2013, the current decline in Indian equity markets has been triggered by rising US bond yields and a selloff by FPIs. 

Benchmark US bond yields have increased by nearly 85 basis points (bps) in the past four months, from 3.78 per cent at the end of September 2024 to 4.63 per cent on Friday. As a result, the spread between the Sensex earnings yield and the US 10-year Treasury yield has turned negative. At its current trailing price-to-earnings ratio of 22.2X, the Sensex offers an earnings yield of 4.51 per cent, nearly 12 bps lower than the yield on US 10-year government bonds. In contrast, the yield spread was positive between July and November last year. 

Sentiment in the Indian equity market has also been dampened by an earnings slowdown. The Sensex’s trailing earnings per share (EPS) has declined by around 1 per cent quarter-on-quarter in the third quarter (Q3) of 2024-25 (FY25), from Rs 3,501.7 at the end of November 2024 to Rs 3,471 on Monday. The earnings outlook remains uncertain, with most brokerages expecting single-digit year-on-year growth for Q3FY25.

 

This mirrors 2013, when the index’s underlying EPS had declined by 4.3 per cent between April and August 2013.

 

It remains to be seen whether there will be a recovery in Indian equity markets in the second half of 2025, similar to the rebound witnessed in the last quarter of 2023, fuelled by higher earnings and fresh FPI inflows.