Stock market investors globally are worried about two major factors- rising US bond yields and elevated crude oil prices. Recently, yields on long-dated debt, such as 30-year bonds, jumped to their highest since June 2007. Benchmark 10-year bond yields are at 4.72%.
Oil prices, on the other hand, are back above $90 per barrel after fresh strikes between the US and Iran. futures rose almost 3% to levels near $91 per barrel after Iran launched strikes on US forces early on Monday after the latter struck Iranian rocket launchers on the Strait of Hormuz.
While both rising US and higher oil prices are negative for market sentiment, it is difficult to say in black and white which poses the greater risk to the Indian stock market. It depends on the context.
For example, oil prices at $90 per barrel may be manageable for India. But if it crosses $100, it becomes the biggest worry for the Indian economy.
Boling oil, climbing yields
Oil prices are a major macroeconomic risk for India, the world’s third-largest importer of the commodity. Higher oil prices can directly impact India’s trade deficit and current account deficit (CAD), which can strain India’s fiscal position.
Higher oil prices may also lead to an increase in fuel prices at home, which can drive inflation up, trigger tighter monetary policy, and adversely impact India’s economic growth momentum, demand, and corporate profitability. This can further weaken the Indian rupee and trigger foreign capital outflow.
Us bond yields, on the other hand, are not a direct macroeconomic threat to India, but they do impact market sentiment by aggravating foreign capital outflow as higher yields make US debt assets relatively more attractive. Foreign capital outflow can weaken the Indian currency and can also increase the cost of corporate borrowings, weighing on stock valuations.
At the current juncture, oil prices at $90 per barrel appear manageable. However, if it reclaims the $100 mark, it will be the biggest worry for the markets and the economy as well.
“Rising US bond yield is the bigger issue because it will impact equity markets globally. Crude oil at $90 a barrel is something that we can absorb right now. But if it flares up beyond $100, that will become an issue,” said V K Vijayakumar, Chief Investment Strategist, Geojit Investments.
“At the present $90 level, it is not something we need to worry too much about, particularly because our foreign exchange reserves are good. The current account deficit is also under control, and the FCNR(B) scheme has mobilised more than what the RBI had planned for. If the US 10-year bond yield goes to 5% from around 4.7%, that is going to be a big problem,” Vijayakumar said.
G Chokkalingam, the founder and head of research at Equinomics Research, however, believes that for the Indian market, the bigger risk is unquestionably oil prices, not US bond yields.
“You can look at the evidence. When US interest rates rose from nearly 0% to 5.25%, there was not much impact on the Indian equity market. There is enough evidence to suggest that the correlation between US bond yields and the Indian stock market is not very strong,” Chokkalingam explained.
For equities, the impact of higher yields is more sentiment-driven. They primarily affect debt markets.
“Money allocated to debt does not necessarily shift to equities simply because interest rates fall, or vice versa. There is considerable evidence to support this. Oil prices, on the other hand, have a direct and significant impact on the Indian economy and markets. India’s oil import bill is enormous, and a sharp rise in crude prices can substantially increase the country’s import costs,” said Chokkalingam.
Chokkalingam also believes that oil prices at $90 is manageable in the short term. But if crude moves close to $100 a barrel, it would definitely become a risk.
“Even in the short term, a move to $100 could be difficult. If crude stays around $100 or rises above that level for a sustained period, it will become painful for both the Indian economy and the stock market,” said Chokkalingam.
Interlinked risks
The two risks of bond yields and oil prices operate through entirely different mechanisms, even though they are interlinked: higher oil prices feed US inflation, raise the risk of monetary tightening, and drive yields up.
Harshal Dasani, Business Head at INVAsset PMS, underscored that rising US yields are a valuation event while oil prices are an earnings and macro event.
“Rising US yields compress multiples everywhere at once, fastest in long-duration sectors like technology, and they redirect global flows toward dollar assets. The damage is sharp, immediate, and largely sentiment-transmitted,” said Dasani.
“Oil at $90 can widen the current account, pressure the rupee already near 96, add 25 to 30 basis points to inflation for every sustained $10 move, and steadily shrink the RBI’s room to ease, eroding the domestic story quarter by quarter rather than overnight,” Dasani said.
Dasani believes that for Indian equities specifically, higher oil prices for a longer period are the bigger risk.
He explained that yield shocks are absorbed by domestic flows, but no flow architecture can offset what expensive crude does to the inflation-rate-currency triangle that underpins the entire bullish case.
“The two are not independent, because oil at $90 feeds US inflation and keeps yields rising, so the true tail risk is the compound scenario where both persist together. That combination, not either alone, is what could genuinely test this market’s uptrend,” said Dasani.
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