US bonds yields saw a major spike during the March quarter, as investors assessed the impact of accelerated vaccinations in the country. Economists expect the US economy to grow at over 6.5 per cent in 2021, the fastest rate of growth since the 1980s.
The expectations of high growth coupled with continued constraints on supply chains caused by the pandemic have led to concerns that inflation in the developed world may make a comeback after decades.
Higher US Treasury Bond yields are considered negative for equities in emerging markets, as that makes it unattractive for a US investors to borrow money and invest in riskier assets like emerging markets.
“With inflationary expectations firming up in the US, and 10-year US Treasury yields hitting the highest level since January 2020, emerging markets face serious vulnerabilities of capital flows reversals and ensuing currency volatility,” the report said.
At home, too, the finance ministry’s report took cognizance of inflationary pressures building up in the economy. Sharp increases in food and core inflation were the key drivers of the surge in headline inflation in February, the report said.
Already, expectations of stellar growth in the US has helped US equities outperform Indian equities during the March quarter as global investors shifted attention to countries where the vaccination drive has been accelerating.
In India, uncertainties have emerged over economic recovery due to a second wave of Covid-19 infections over the past few weeks. On Sunday, the country’s richest state Maharashtra imposed strictest measures to curb the virus spread since last year’s national lockdown.
“India is well armed to combat any downside risk posed by the recent surge in Covid-19 cases,” the report said.
