These days, the hottest talk in the corridors of the global financial market and stock market is about the return of a 'superstar' whose very name sends shivers through the stock markets all over the world. Yes, we are talking about US Treasury Bonds, whose yield in the last few weeks has reached a level that was never seen in the history of the last 22 years. This rapid and aggressive withdrawal of US Treasury bonds has given financial analysts around the world sleepless nights. This incident is not being considered a good sign at all for emerging markets like India. Whenever US treasury bonds strengthen and their yields skyrocket, then the coffers of foreign investors (FIIs) from developing countries like India start emptying and they start moving all their money out of the Indian stock market and towards safe US bonds. This new move of the American economy has again increased the concerns of the Reserve Bank of India and policy makers.
If we understand this mathematics of international money market and bond yield in simple words, whenever interest rates in America remain at high level and investors start getting huge returns on government treasury bonds without any risk, then smart money from all over the world starts looking for safe haven in US government bonds from risky assets like stock market. This is the reason why Indian stock markets have witnessed heavy selling in the last few days. Foreign institutional investors have pulled out thousands of crores of rupees from Indian equities, causing continued pressure on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) indices. This storm of treasury bonds, which has returned after 22 years, is completely sucking the global liquidity, which is having a direct impact on India's foreign exchange reserves and the health of the rupee.
Weakness of rupee and looming danger of imports becoming expensive
The first and most fatal impact of the strengthening of US treasury bonds and the continuous rise in the dollar index falls on the Indian currency i.e. rupee. When foreign investors withdraw dollars from the Indian market and take them back to America, the demand for dollars in the domestic market increases and the rupee continuously weakens in comparison to it. This weakness of the rupee means that it will become very expensive for India to import crude oil, coal, gold and other essential goods from abroad. When the import bill increases, there is a danger of increase in the prices of petrol, diesel and everyday items within the country, which ultimately leads to direct impact of inflation on the pockets of the common man. Economists believe that if this situation continues for a long time, the country's current account deficit (CAD) may also be negatively affected.
Big challenge facing Reserve Bank of India (RBI)
Amidst this global financial crisis and the increasing pressure of treasury bonds, a big challenge has arisen before the country's central bank i.e. Reserve Bank of India (RBI). To stop the falling value of the rupee and to stop the large-scale exodus of foreign investors, the RBI has to continuously use its forex reserves. Although India's economic condition is much stronger than in previous global recessions and the country has sufficient foreign exchange reserves, yet the impact of US Fed Policies may slow down India's domestic growth cycle for some time. Investors and stock market experts are now waiting to see what stance the US Federal Reserve takes regarding interest rates in its next meeting, because only then will it be decided how much this ghost of bonds, which has returned after 22 years, is going to scare the global market.