In April, the Nifty Microcap index was up 21.55%, an unprecedented rise since its launch in 2022. The CNX500 rose 10.5%, the only month in the past five years in which the index was up by more than 10%. The market decline in March was treated like a festival-season discount sale. Retail investors kept pouring more than ₹28,000 crore a month into systematic investment plans (SIPs), even as the Hormuz Strait — through which roughly 20% of global oil and gas trade passes — has remained closed since 2nd March. But something changed last week. For starters, prime minister Narendra Modi made an extraordinary public appeal urging Indians to curb foreign travel and avoid buying gold for one year. Governments do not usually ask citizens to postpone holidays or curb gold purchases unless there is a serious underlying anxiety about the balance of payments, currency stability and foreign exchange outflows.
Then, on Friday, the US 10-year Treasury yield—the benchmark that influences borrowing costs, asset valuations and capital flows across the globe—breached 4.5%. At the close on Friday, 27th February, the yield stood at 3.95%, after falling sharply that day. Missiles blazed over that weekend, so when the market opened on 2nd March, the yield shot up as traders started pricing in higher oil prices, disrupted supply chains, sticky inflation and permanently elevated interest rates. Through much of April, yields drifted sideways as headlines about possible ceasefires and back-channel diplomacy created periodic bursts of optimism. When those hopes proved false, yields started edging higher. Then came last Friday’s decisive break. The 10-year Treasury yield jumped another 2.54% in a single session, finally breaching 4.5%, after it became clear that US president Donald Trump’s highly publicised China trip had produced little beyond diplomatic theatre and that the Strait of Hormuz would remain effectively closed for the foreseeable future. What are the implications of this for India?
To Indian investors, a sharply rising US bond yield may sound like an obscure statistic from a distant financial universe. In reality, it is the gravitational constant of global finance. When it moves sharply, everything else eventually shifts around it, especially since it comes at a particularly difficult time for India. The rupee has already depreciated more than 6% this year, making it one of Asia’s weakest major currencies and is now drifting dangerously toward the psychologically important level of ₹100 to a dollar. The rupee’s weakness is not because the dollar is staging a spectacular global rampage. The Dollar Index remains well below its 2022 peak near 114. The rupee is weakening even without an overwhelming dollar surge, suggesting the pressure is increasingly India-specific.
Weakening currencies are like fevers, indicating a systemic illness. India’s vulnerability has always been energy. The country imports nearly 88%–90% of its crude oil requirements. Oil accounts for roughly a quarter of India’s total import bill. For years, abundant global liquidity masked this weakness. Investors were willing to overlook trade deficits so long as the macroeconomic situation remained stable. But old vulnerabilities re-emerged with surprising speed when Iran closed the Hormuz Strait. Brent crude, which averaged around US$78 a barrel earlier this year, briefly crossed US$120 amid fears of supply disruptions and continues trading well above US$100. For India, expensive oil is a tax on the entire system. Every US$10 increase in crude prices widens India’s current-account deficit by roughly 0.3–0.4 percentage points of gross domestic product and raises inflationary pressures across sectors. As I wrote in March, energy drives fertiliser costs which drives food prices which drives inflation, and inflation feeds back into energy through currency depreciation. This seems to be happening now.
In April 2026, the wholesale price index (WPI) leapt to 8.30% (accelerating sharply from 3.88% in March), while inflation in several categories remains in double digits. All eyes are on headline consumer price index ( CPI) inflation which will be hit with a lag. If it goes above 6%, breaching the Reserve Bank of India’s tolerance band, while the rupee slides toward 100, policy-makers will be forced to tighten liquidity conditions again. India’s growth story currently rests on a fragile balancing act: consumption, public-capex spending and domestic liquidity. Higher interest rates threaten each pillar simultaneously.
Bond markets are beginning to sense this tension. India’s 10-year government bond yield has climbed back above 7.3%, reflecting concerns over inflation, capital outflows and higher government borrowing requirements. Bond markets are often the first place where economic reality reasserts itself. Equities usually notice later. The trouble for India is that the warning lights are beginning to flash all at once: US Treasury yields above 4.5%, oil above US$100, inflation above 6%, bond yields above 7%, foreign outflows above ₹2 trillion and a rupee inching toward 100. Each problem alone is manageable. Together, they begin to resemble the ingredients of a macroeconomic pressure cooker. If there is no resolution to the US-Iran stalemate in the next few weeks, Indian markets will have to adjust to the new emerging risks.
(This article first appeared in Business Standard newspaper)
A lot of uncertainty has already been factored in. In fact, it has been factored in 2-3 months back itself. Many pundits are expecting US-Iran war to be a long-drawn stalemate like Russia-Ukraine, with China/Russia having the upper hand.
Having said this, I don't think things are as bad as many pundits make out to be (maybe they are right, but historically pundits have been completely wrong rather than approximately right).
With Bengal elections done, public-capex will be on the roll in that state and for next year's UP elections. Fiscal situation needs to be looked at. It's the only thing that needs to be watched out for, at least in my view. I'll be happy to be proven wrong.
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Having said this, I don't think things are as bad as many pundits make out to be (maybe they are right, but historically pundits have been completely wrong rather than approximately right).
With Bengal elections done, public-capex will be on the roll in that state and for next year's UP elections. Fiscal situation needs to be looked at. It's the only thing that needs to be watched out for, at least in my view. I'll be happy to be proven wrong.