What a 5% US 10-year yield means for India: 6 factors to watch

New business data points to the fact that The US 10-year Treasury yield breaching 5 percent is emerging as a new headwind for India, raising the risk of foreign equity outflows and domestic benchmark yields rising above 7 percent. A weaker indian rupee could add to imported inflation, raise bond yields and borrowing costs, and put further pressure on equity valuations.

FPIs have already net sold nearly Rs 14,475 crore of Indian equities in September, after buying in July and August. Elevated global bond yields, alongside a sharp climb in crude prices, have made the backdrop less favourable for emerging-market equities. 1. Foreign portfolio outflows

Elevated US Treasury yields make dollar-denominated assets more attractive relative to emerging-market investments. If yields stay elevated, foreign market participants could reassess returns from emerging market equities and bonds, increasing the risk of further outflows. Sustained foreign selling can add pressure to both Indian equities and the indian rupee, particularly if elevated US yields are accompanied by a stronger dollar or expectations of tighter US monetary policy. 2. Indian rupee depreciation

Elevated US yields can backing the dollar and put pressure on emerging-market currencies, including the indian rupee. A weaker indian rupee additionally raises the cost of servicing foreign-currency debt and can gain refinancing costs for firms with external commercial borrowings. The indian rupee opened at 95.87 against the dollar on Tuesday as it remained under pressure. Brent crude was around $107 a barrel in Asian trading. 3. Imported inflation

A weaker indian rupee makes imports more expensive, while elevated crude prices gain India's import bill and can add to domestic inflation pressures. Pinky Yadav, Commodity Fundamental Market observer at Choice Broking, stated, "Global markets faced heightened volatility as WTI oil topped $100 per barrel amid geopolitical supply disruptions and pipeline shutdowns. Anticipation of a likely 25-basis-point The US central bank interest-rate gain propelled the dollar and pushed US 10-year Treasury yields to 5%, pressuring bullion into bearish territory on MCX and dragging the indian rupee to a seven-week low." 4. RBI policy

With dollar assets offering attractive returns, foreign portfolio market participants are pulling capital from EM equities, putting pressure on the indian rupee. At the same time, crude prices near $107 a barrel could widen India’s trade deficit. This leaves the RBI with a difficult choice, as supporting the currency may require keeping domestic borrowing costs elevated. For Indian firms, the result is elevated costs on foreign-currency debt alongside tighter domestic credit. The RBI's October monetary policy meeting will as a result be closely watched for its assessment of the indian rupee, crude prices, inflation and global interest rates.

5. Elevated borrowing and refinancing costs

A weaker indian rupee could additionally raise overseas borrowing and refinancing costs for Indian firms. For businesses, the impact could be more pronounced if global funding costs stay elevated for an extended period. Elevated interest costs can additionally affect investment decisions and corporate profitability.

The key question is how long US yields stay elevated and how strongly that affects foreign flows, the indian rupee and investor sentiment.

Global markets will focus on the The US central bank's September 15-16 FOMC meeting and Fed Chair Kevin Warsh's guidance on the path of US rates. Markets are widely expecting a 25-basis-point hike. If it goes ahead, it would be the first interest-rate gain under Warsh's leadership as Fed chair.