Bond Yields Rise, Threatening India's Equity Market

The Indian equity market's focus is shifting from earnings season to macroeconomic factors as bond yields rise across major economies. The 10-year Indian government bond yield has reached a fresh three-month high of 7%, while the US 10-year Treasury yield is around 4.8%, its highest level since late 2023.

Yields have climbed across other major markets too, with the UK and Australia above 5%. Japan's 10-year yield has moved towards 3% this year, reaching levels last seen roughly three decades ago.

The rise in global bond yields is driven by governments borrowing more to fund pandemic-era spending and defence, central banks stepping back as bond buyers, and investors demanding higher compensation for holding government debt.

Resurgent inflation, amplified by oil-price shocks linked to the Iran conflict, adds to the pressure. A sustained rise in bond yields could challenge richly valued stocks and rate-sensitive sectors, even if corporate earnings remain resilient.

The transmission is straightforward: as relatively safe government securities offer higher returns, investors demand a higher risk premium from equities, putting pressure on valuations. Foreign institutional investors have been relentless sellers in the cash market, with net outflows reaching ₹3.51 lakh crore in the first eight months of this year.

Domestic institutional investors, however, continued to absorb the selling pressure, recording net buying of ₹5.68 lakh crore. A rise driven by inflation, crude prices or expectations of tighter monetary policy would be more disruptive than a rise driven by stronger economic growth.