The 10-year US Treasury yield has been trading near its highest level since October 2023, while the latest selloff has pushed 30-year yields to their strongest level since 2007. This is despite the large buyback announced by the US Fed and the impact of this can be seen in markets across the world, including India. Why is the rising yield such a big worry for the equity markets? Experts outline multiple concerns.
Sandipan Roy, CIO – Motilal Oswal Private Wealth pointed out that “when the rates go up in a market like the US, the entire world will also feel the pressure. At some point, this will have a domino effect. The mortgage prices go up, personal loan prices go up, business loans go up. This will have a domino effect at some point. Right now, it is still a supply-side pressure and not a risk perception.”
Especially in the Indian context, given that we are typically in the phase when food inflation spikes, the impact of the high yield on the market is multifaceted.
#1 Rupee depreciation & higher inflation worries
One of the most direct impacts of the higher yield is decidedly on the rupee’s trajectory. The Indian currency continues to be in focus as the higher US yields attract global dollar flows. This in turn strengthens the dollar index, and a stronger dollar would then exert downward pressure on the rupee.
Interestingly, the massive $130 billion-plus inflows that came to India under the FCNR (B) scheme helped strengthen the rupee significantly from the low of 96.96 to the dollar in May to the 95 Vs dollar in September. However, the longer-term impact of the high yields on the rupee needs to be monitored.
According to market veteran Ajay Bagga, “A weaker rupee increases India’s import bill (especially for crude oil and electronic components), stoking domestic inflation and forcing the RBI to keep domestic interest rates higher for longer.”
Motilal Oswal’s Sandipan Roy added that “inflation traditionally always spiked up between June to October due to food inflation. Oil has refused to come down at the same time, and this crisis seems to be continuing forever. So all of this means that the inflation expectations in India are higher. You know, that may be the only why our yields would be wanting to harden.”
Higher inflation could lead to further hardening of the bonds. The higher yield compensates for the actual money loss in real terms.
#2 Risk of capital outflows
The other big risk is decidedly that of capital outflows. India has been seeing significant outflows anyway. Foreign Institutional Investors (FIIs) have so far pulled out over Rs 2.32 lakh crore from Indian equities in 2026. This has surpassed the total outflow seen in entire 2025.
Ajay Bagga pointed out that “US government bonds are considered risk-free assets. When their yields rise, the return differential between safe US Treasuries and riskier emerging market equities narrows. Foreign Institutional Investors (FIIs) tend to pull capital out of Indian stocks to lock in high, guaranteed dollar-denominated yields back home.”
He added that “investors would be happy to ride continued high US bond yields and fund returns while avoiding any currency risk,” in such a scenario.
Roy corroborated the point and explained that “as the US yields go up, the relative attractiveness of Indian yields goes down, and hence you can see outflows happening.”
But the correlation hasn’t been that simple in the Indian context. “Because we tried to manage it with tax sops given on FII flows, in debt and some FII flows came in. The yields also softened from 7.15 to 6.75. But from there, again, tracking the global cues, it has moved back to 6.85 levels,” Sandipan added.
# 3 Compression of equity valuations
Equity valuation is the other big concern as the yield spike continues to unsettle investors globally. Bagga pointed out that “higher global risk-free rates directly alter valuation models (like Discounted Cash Flow models). When the risk-free rate (R_f) increases, the discount rate applied to future corporate cash flows rises, reducing the present value of those cash flows.”
As a result, “High-valuation growth stocks and long-duration tech companies see their Price-to-Earnings (P/E) multiples shrink,” he added.
According to Sandipan Roy, “We have had a healthy time correction, and hence a little bit of PE derating has already happened. That’s why even in the Nifty we are slightly less than the mean for the last 10 years. The spike in the global yields, obviously, will add to the natural discounted cash flow method PE rerating or derating, which should happen. So the risk perceptions will go up and hence valuation should come down, which means prices should come down.”
# Direct cost of capital & overseas borrowing
Rising US yields also results in the cost of capital going up. Bagga elaborated that it pushed up “foreign borrowing costs for Indian corporates issuing External Commercial Borrowings (ECBs) or dollar bonds. This increases interest expenses, squeezes profit margins, and can slow down corporate capital expenditure (Capex) plans.”
Will the yield spike end any time soon?
Though the 10-year in India has operated within a tight range for quite some time, globally the yields continue to spike. The US yields, especially for the 10-year and the 30-year paper, are seeing this kind of spike after more than 2 decades.
The big question is could it move even higher? Experts believe that all bets are off on when this party will end, given the deluge of liquidity. The Motilal Oswal CIO explained how “everyone wants to have a pie of the US markets – regarded as a safe haven. Given the liquidity surge, we don’t know when this party will end.”
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.