Global Bond Yields, AI Debt Financing Raise Cost Of Capital For Emerging Markets: DEA Secretary

Economic Affairs Secretary Anuradha Thakur has highlighted rising global bond yields and debt-financed AI investments as potential challenges that could raise the cost of capital, especially for developing nations. Addressing the Kautilya Economic Conclave, Thakur explained that government bonds now make up more than 80% of global GDP, making sovereign debt markets a key benchmark for capital costs throughout the financial system.

As governments borrow more, investors demand higher compensation for inflation, fiscal uncertainty, and interest rate risks, she explained.

Thakur pointed out that US Treasury bond yields have reached 5.34%, the highest level since 2002, while Japanese yields have risen to their highest since 1996. She noted that the expansion of AI infrastructure is adding a new dimension to global capital markets. Constructing data centers, semiconductor capacity, and power grids necessitates considerable investments, with a growing portion of these funds coming from debt.

Consequently, global bond yields cannot be evaluated solely based on monetary policy and fiscal deficits; the scale of AI investments also affects capital demand.

Thakur also mentioned that geopolitical factors and security concerns in global trade could further constrain the efficient flow of goods and capital, ultimately increasing financing costs. On a positive note, she noted signs of recovery in India's private investment sector after an extended period of decline. Capital formation in India's first quarter of fiscal year 2027 (Q1 FY27) grew at its fastest pace in over three years, with private companies committing investments in power, data centers, and metals.

Banks have also increased lending to large and medium industries, as well as micro and small enterprises. Foreign direct investment (FDI) is increasingly supporting India's capacity development rather than merely acting as a low-cost manufacturing base, Thakur stated.

India attracted gross FDI inflows of $97 billion in fiscal year 2026 (FY26), while Q1 FY27 saw $29.3 billion in inflows. Net FDI inflows were around $7 billion in FY26, indicating investor repatriations and overseas investments by Indian companies. Thakur concluded that these developments indicate confidence in India's economic fundamentals and deliberate macroeconomic policy decisions.