Then, on Friday, the United States’ (US’) 10-year treasury yield — the benchmark that influences borrowing costs, asset valuations and capital flows across the globe — breached 4.5 per cent. At the close on February 27, the yield had stood at 3.95 per cent, after having fallen sharply that day. Missiles blazed over that weekend, so when the markets opened on March 2, the yield shot up as traders started pricing in higher oil rates, disrupted supply chains, sticky inflation, and permanently elevated interest rates. Through much of April, yields drifted sideways as headlines about possible ceasefires and backchannel diplomacy created periodic bursts of optimism. When those hopes proved false, yields started edging higher.
Then came last Friday’s decisive break. The 10-year treasury yield jumped and finally breached 4.5 per cent, after it became clear that US President Donald Trump’s highly publicised China trip had produced little beyond diplomatic theatre and that the Strait of Hormuz would remain effectively closed for the foreseeable future. What are the implications of this for India?
To Indian investors, a sharply rising bond yield in the US may sound like an obscure statistic from a distant financial universe. In reality, it is the gravitational constant of global finance. When it moves sharply, everything else eventually shifts around it, especially since it comes at a particularly difficult time for India. The rupee has weakened sharply in recent months and is now drifting dangerously towards the psychologically important level of ₹100 versus the dollar. The Indian unit already depreciated more than 6 per cent this year, making it one of Asia’s weakest major currencies. This is not happening because the dollar is staging a spectacular global rampage. The dollar index remains well below its 2022 peak near 114. The rupee is weakening even without an overwhelming dollar surge, suggesting the pressure is increasingly India-specific.
Weakening currencies are like fevers, indicating a systemic illness. India’s vulnerability has always been energy. The country imports 88-90 per cent of its requirements of crude oil. Oil accounts for roughly a quarter of India’s import bill. For years, abundant global liquidity masked this weakness. Investors were willing to overlook trade deficits so long as the macroeconomic situation remained stable. But old vulnerabilities re-emerged with surprising speed when Iran closed Hormuz. Brent crude, which averaged around $78 a barrel earlier this year, briefly crossed $120 amid fears of supply disruptions and continues trading well above $100. For India, expensive oil is a tax on the entire system. Every $10 increase in the price of crude oil widens India’s current account deficit by 0.3-0.4 percentage points of its gross domestic product (GDP) and raises inflationary pressures across sectors. As I wrote in March, energy drives fertiliser costs, which drive food prices. Food drives inflation, and inflation feeds back into energy through currency depreciation. This seems to be happening now.
In April, the rate of the wholesale price index leapt to 8.30 per cent (accelerating sharply from 3.88 per cent in March), while the inflation rate in several categories remains in double digits. All eyes are on the retail inflation rate, which will be hit with a lag. If it goes above 6 per cent, breaching the Reserve Bank of India’s tolerance band, while the rupee slides toward 100, policymakers will be forced to tighten liquidity conditions again. India’s growth story currently rests on a fragile balancing act: Consumption, public-capex spending, and domestic liquidity. Higher interest rates threaten each pillar simultaneously.
Bond markets are beginning to sense this tension. India’s 10-year government bond yield has climbed back above 7.3 per cent, reflecting concerns over inflation, capital outflows, and higher government borrowing requirements. Bond markets are often the first place where economic reality reasserts itself. Equities usually notice later. The trouble for India is that the warning lights are beginning to flash all at once: US treasury yields above 4.5 per cent, oil above $100, inflation above 6 per cent, bond yields above 7 per cent, foreign outflows above ₹2 trillion, and a rupee inching toward 100. Each problem alone is manageable. Together, they begin to resemble the ingredients of a macroeconomic pressure cooker. If there is no resolution to the US-Iran stalemate in the next few weeks, Indian markets will have to adjust to the new emerging risks.
The writer is cofounder of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers
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