An ET study of seven phases since 2005 when the US benchmark 10-year bond yield rose over 120 basis points shows that Nifty ended up advancing on five occasions. On one occasion, the Nifty was flat, while in 2010-11, the Nifty declined around 20%.
In the past five trading sessions, the Nifty has declined 3% amid the 41-basis-point spurt in the US 10-year yield in the past one month. The rise in bond yields has been on expectations that the US Federal Reserve might be forced to raise policy rates faster in 2022 in the wake of accelerating inflationary pressures.
Analysts expect the market to shift focus to economic revival once the concerns over rising inflation and tighter monetary policy ease. “It is important to note that the reversal in interest rate cycle is normal accompanied by higher inflation and improving economic growth outlook, which is positive factors for corporate earnings and consequently for the equity markets,” said Gaurav Dua, head-capital market strategy, Sharekhan. “The bond yield stabilises at higher levels, and the impact of the same gets factored in over 2-4 months.”
Between June 2005 and June 2006, US bond yields rallied from 136 basis points. During this period, Nifty was up 43%. From December 2008 to June 2009, US yields jumped 189 basis points, while the Nifty rallied 56%. During August 2020-April 2021, when US yield surged 120 basis points, Nifty gained 32%.
But such gains have often happened after initial uncertainty. A chaotic bond market tends to puts pressure on equities.
“During the initial period of interest rate reversal, we expect markets to be choppy,” said Amnish Aggarwal, head of research, Prabhudas Lilladher. “However, pickup in domestic demand and increased visibility at the end of the third wave will eventually decouple Indian markets.”
Foreign portfolio investors (FPIs) have been net buyers in five of these seven phases. From July 2012 to September 2013, they bought shares worth 1.55 lakh crore, while between August 2020 and April 2021, they put in 2.55 lakh crore in Indian equities.
Since October, FPIs have been selling Indian equities amid signals from the US Fed to reverse its ultra-accommodative monetary policy.
Analysts said while valuations are still rich, which make equities vulnerable to rising bond yields, there is comfort around the strength in the Indian economy.
“This time, the situation is much more comfortable with record-high forex reserves, inflation within the RBI’s tolerance band, a stable currency, and sound macro fundamentals,” said Shiv Chanani, head of research, Elara Securities. “In the previous US tapering, oil — India’s key import — was much higher above $100 per barrel, and this time around, it is range-bound at about $80 per barrel.”
Mitul Shah, head of research, Reliance Securities expects equities to bounce back by the end of FY22 and beginning of FY23. “The stock market would give a double-digit return in 2022,” said Shah.