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With the increasing interest rates announced by the US Federal Reserve to curb inflation, the yield on the 10-year bond witnessed a hike to 4.163% on November 4, 2022. Will this impact India or will the Indian economy remain untouched?

Bond yield in India…

Since the investors were adding positions, bond yields by the Indian government was trading marginally lower on November 7, 2022. With this, strengthening of Rupee also assisted in risk sentiment.

As per analysts, rise in the Rupee – the last week – has been providing confidence to the investors for adding debt at the present levels. In more than two weeks, the Rupee was trading to its highest level. This was because of the dollar witnessing a downslide following the US jobs report that was released on Nov 4, 2022.

Does bond yield indicate inflation?

There is an inverse relation between bond yields and bond prices. In case, there is a rise in bond prices, the yield declines – and vice versa.

Bond yields by the Government are indicative of the inflation rate and expectations on interest rates of a country. At the time when inflation rates are high, issuances of newer debt are offered at a higher yield. In such cases, bond yields look very uninteresting for the investors.

Inflation in the US

Rise in prices of commodities has been one of the plaguing issues brought to fore by people in the US. In the month of September, annual inflation was at 8.2%, which was marginally down by 9% as reported in the month of June.

The hike in prices of groceries, gasoline and other necessities have increased the pressure on the US consumers. Along with this, the cost of living has been increasing by less than 2% per year.

The Fed has raised the benchmark rates six times this year. This has witnessed a surge in the borrowing cost for consumers trying to buy a car, house or using credit card (with balance). Analysts predict that rates are going to witness a hike marginally in the future. With other banks across the global market increasing the interest rates post Fed’s announcement – this might be the advent of economic slowdown, economists predict.

Should India worry?

Bond yields are considered to be the opportunity cost for investing in equities. One of the safest bonds in the world is the US Treasury Note and it is considered to be at a risk-free rate. In case, the investors are to be attracted to invest in equities, the market would have to justify a risk-premium. In the context where the bond yield in the US witnesses a rise, the cost that companies would have to pay for raising capital also increases. The rise in bond yields pressurizes the companies to give higher returns to the investors. In case, the companies fail to do this, the investors most likely liquidate the investments. With that, they park their funds in the US bonds.

With the rise in bond yields, inflows from foreign institutions witness a shift from Indian equities to US bonds – since it is considered to be a safe haven. An increase in US bond yields might also depreciate the value of the Rupee. This hurts the bottomline of the companies who have borrowed money in US dollars. While, tech and pharma companies are able to earn more when the Rupee depreciates against the US dollar.