Higher yields in US test India’s macro resilience

US 10-year Treasury yields have soared above 5%, while the Federal Reserve is set to hike rates to curb inflation, with implications for India. The yield gap between the US and India has narrowed, limiting inflows. This rise in yields raises fiscal risks by increasing borrowing costs, particularly for long-term issuances. Experts see a potential "higher for longer" environment, reminiscent of pre-2000s market conditions.

India must navigate these challenges carefully. The Fed's rate hikes may be shorter than initially thought, as inflation is nearing the 2% target. However, short-term rates could remain elevated, increasing yield pressures. India's resilience to US yield pressures is notable, with a significant decline in macro sensitivity over the past decade.

Strong macro fundamentals, including stable fiscal deficits, controlled inflation, and ample reserves, contribute to this resilience. However, concerns remain, such as the potential bursting of an AI bubble, geopolitical tensions between the US and Iran, and state financing challenges. Despite these risks, India's robust fundamentals suggest it can withstand global volatility if it acts wisely.