The rising US yields along with a stronger dollar can raise India Inc’s overseas borrowing and debt-servicing costs, though economists say India’s strong fundamentals offer protection. US 10-year treasury yields hit 4.98% on Thursday, the highest since 2007.
“So far, the impact should largely be on the cost of dollar funding, but given relatively low current account funding requirements, the Indian macroeconomic backdrop can withstand higher funding costs,” said Rahul Bajoria, head, EM Asia (ex-China) economics, Barclays.
The US 10-year treasury was trading at 4.96% on Thursday after crossing the 4.9% mark, a level last witnessed nearly 16 years ago during the global financial crisis, fuelled by expectations that that the Federal Reserve will keep interest rates at restrictive levels to cool inflation that’s still stubbornly above the central bank’s target.
The benchmark BSE Sensex fell 247.78 points, or 0.38%, to 65,629.24, while the broader NSE index lost 53.55 points, or 0.27%, to 19,617.55 the back of the selloff in global stocks on worries over escalating tensions in West Asia and rising yields in the US.”The US yields are now clearly heading north of 5% and this will have a bearing as the interest rate differentials have narrowed significantly between the US and India and this poses a risk of flight of capital from India to the US,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank, adding that along with the treasury yields rising, another important negative impact is the crude oil prices.
Indian bond yields could come under pressure, economists said. “The impact is likely to be on domestic bond yields that correlate well with US yields, and a level of 7.4% plus for is possible,” said Abheek Barua, chief economist, HDFC Bank.India’s 10-year government bond yields were trading at 7.353% on Thursday.
“Central bank intervention through multiple channels – local spot, NDFs (non-deliverable forwards) and swaps might keep it in the 7.2-7.3% handle, but a sharp upmove in the dollar could see it move beyond the range,” Barua stated, noting that equity markets and the rupee will remain under pressure.
India’s foreign exchange reserves dipped for the fourth consecutive week to $584.7 billion on October 6.
“The rise in US yields is a global ‘push’ factor, which, all else equal, dampens incentive for flows to emerging markets like India. Per se, it’s a negative, especially for the carry appeal.
However, foreign debt flows are not a huge component of portfolio flows in India’s case, and the upside to USD/INR due to this will be modest and manageable,” said Dhiraj Nim, FX strategist, ANZ Research.
Nim further pointed out that equity flows, which chase the growth story, are more prominently in focus for India but noted that it is certainly expected to increase domestic yields. However, experts indicate rising yields may not exert much pressure on government finances either.
“I think domestically, from this quarter onwards, we have a limited G-Sec net supply, which is one advantage and beyond that what really helps is India’s inclusion in the JP Morgan Global Bonds Index. That is something which will at least provide a buffer, over the course of the next few quarters,” Bhardwaj said, adding that in the near term the impact of higher treasury yields, higher crude oil prices and OMO sales will be negative. “So, we do see some further weakening of the bond market in India.”
“Government borrowing plan is as per expectations, and the recent rise in tax collections has for now allayed any concerns of fiscal slippage. Markets will likely be more forgiving; therefore, I do not see any substantial impact on macro,” Nim said.