The US bond market has emerged as one of the important triggers for the Indian stock market. At the same time, the massive investment cycle around artificial intelligence (AI) has intensified demand for capital, particularly in the US technology sector, according to market experts.
For India, the combination of high US bond yields, a strong dollar, elevated crude oil prices and stretched valuations has created a challenging environment for foreign portfolio investors (FPIs).
Analysts say that any sharp reversal in the AI investment cycle could potentially alter these global capital flows by bringing down US bond yields and redirecting money towards emerging markets.
The benchmark 10-year US Treasury yield stood at 5.230%, its highest level since July 2007, while the 30-year Treasury yield hovered around 5.556%, remaining close to its highest level since 2004.
At the shorter end of the yield curve, the policy-sensitive two-year Treasury yield was near 4.956%, maintaining its highest level since May 2024.
Why US Treasury yields matter for Indian stocks?
The rise in US Treasury yields has made dollar-denominated government debt increasingly attractive to global investors.
“When investors can earn a higher return on US government debt, they often demand a greater return to hold emerging-market equities. That can encourage foreign investors to reduce exposure to India, particularly when valuations leave limited room for earnings disappointments,” said Sugandha Sachdeva, founder of SS WealthStreet.
Sachdeva further explained that higher US yields can therefore put pressure on the valuation multiples of Indian equities. When risk-free returns in the world’s largest economy rise, investors may become less willing to pay elevated valuations for emerging-market stocks.
The impact is also transmitted through the currency market. A stronger dollar and higher US yields can encourage capital to move towards US assets, while foreign selling of Indian equities can put additional pressure on the rupee, she added.
AI spending adds another layer
According to Seema Srivastava, senior research analyst at SMC Global Securities, the connection between US Treasuries, AI spending and Indian equities operates through capital flows, valuation multiples and currencies.
“The global macro landscape connects US Treasuries, massive artificial intelligence spending, and Dalal Street through capital flows, valuation multiples, and currency channels,” Srivastava said.
She added that trillions of dollars of debt-funded AI infrastructure spending, combined with large US fiscal deficits, have intensified competition for global capital and pushed the 10-year Treasury yield above 5%.
This has also narrowed the yield differential between Indian government bonds and US Treasuries. According to Srivastava, this reduces risk-adjusted arbitrage opportunities and can encourage FPIs to shift money towards safer dollar-denominated assets and select global technology stocks.
“For the Indian stock market, an “AI blowout”—whether from an earnings-driven normalization in overstretched valuations or a peak in debt-heavy capex cycles—serves as a primary catalyst for capital realignment. Elevated US bond yields currently cap Nifty’s valuation multiples, which are heavily sustained by domestic retail and mutual fund inflows, while also exerting downward pressure on the rupee and raising external borrowing costs for Indian corporates,” she said.
Srivastava added that An AI blowout would unwind peak terminal rate expectations in the US, driving Treasury yields lower and prompting institutional capital to pivot away from saturated tech mega-caps toward real-economy structural growth markets.
“While an initial tech sell-off could trigger knee-jerk global volatility, the subsequent easing of US bond yields and dollar strength would reopen foreign liquidity taps for India, directly benefiting credit growth, domestic consumption, and capital expenditure across infrastructure, manufacturing, and banking,” said Srivastava.
Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.
