India is not immune to global shocks and the combination of U.S. fiscal slippage, elevated treasury yields, and renewed tariff pressures is one of the biggest stress tests we face right now. These are not distant issues, they directly shape how capital flows, how our currency behaves, and how much policy space we have at home.
We have seen this play out before. In 2022, when U.S. 10-year yields surged, India saw foreign investors pull out over $17 billion. A similar pattern repeated in 2024. Today, with U.S. yields still hovering around 4.26% and India’s benchmark at 6.43%, the spread is narrowing. That makes Indian assets less attractive not because our fundamentals are weak, but because global capital always chases relative returns.
The rupee, naturally, feels the strain. Back in late 2023, as U.S. yields touched 5%, the rupee slid to ₹83.40 against the dollar even with RBI stepping in. Since we import 85% of our crude, even small currency moves can amplify inflation.
And the backdrop just shifted again, Fed Chair Jerome Powell, at Jackson Hole, on 22nd Aug 25 flagged that the U.S. job market is showing cracks while tariffs are already pushing consumer prices higher. With headline inflation at 2.7% and core inflation at 3.1% both above the Fed’s comfort zone he signalled rate cuts may be coming, but the path won’t be straightforward.
For India, this opens up a potential silver lining. A Fed easing cycle could support flows into Indian bonds, offer some near-term relief for the rupee, and help ease imported inflation pressures. It would also give the RBI more flexibility to balance growth and stability without fearing sudden capital outflows.
This is why India’s policy calculus is so finely balanced. In June, the RBI cut the repo rate by 50 basis points to 5.50% and lowered the CRR by 100 bps to 3%. By August 6, they chose to pause, shifting to a neutral stance. Why? Because when U.S. deficits keep yields elevated, India cannot afford aggressive easing without risking capital flight and further pressure on the rupee.
And just as bond markets tighten the screws, geopolitics adds another layer. On August 6th, the U.S. announced a 50% tariff on select Indian imports, from textiles and gems to leather and chemicals. Pharma and electronics were spared, but the message is clear, tariff risks are back, and they can hurt exports, weaken investor sentiment, and complicate monetary policy.
The good news, India is stronger than it was a decade ago. Forex reserves are above $650 billion. The current account deficit is contained at 0.6% of GDP. GST collections remain buoyant. And UPI is powering digital growth with over 14 billion transactions a month. These buffers give us breathing room.
So, how vulnerable are we?
We’re not fragile, but we are exposed. The challenge isn’t about internal weakness — it’s about navigating a volatile global backdrop where U.S. fiscal choices and Fed policy ripple into our markets, currency, and policymaking.
India can ride this out but only if we remain agile. That means clear communication, smart hedging, disciplined fiscal policy, and a firm grip on liquidity. Global tides are shifting, but with resilience and foresight, India can hold its ground.
Ajay Kumar Yadav is the CFP CM, Group CEO & CIO of Wise FinServ
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