On 28 September 2026, the US 10-year Treasury yield stood at 5.21%, its highest in close to two decades, on Trading Economics data. Most coverage of the US bond yields impact on Indian stock market prices stops at that number.
The number on its own explains very little. What moves money out of India is not how much a US government bond pays. It is how much more an Indian government bond pays than a US one, and that difference has been shrinking.
A year ago it was about 2.36 percentage points. It is now about 1.90.
What happened, and why it happened now
The Federal Reserve raised rates in September 2026, its first increase since 2023. Markets had priced the move at better than 90% odds beforehand.
That single decision reset expectations. Traders now put the odds of another quarter-point increase at the Fed's next meeting at roughly two in three. Swap markets are pricing three more quarter-point rises over the coming year.
Several things pushed in the same direction. Fed officials signalled more tightening was needed. The University of Michigan survey confirmed a sharp rise in US inflation expectations during September. US economic data stayed strong, government debt kept growing, and the Treasury's own attempts to cap long-dated yields through buybacks were seen as having limited effect.
The result was a bond market sell-off. The 10-year hit a 19-year high, and the 30-year reached its highest level since 2004.
None of that is about India. All of it lands on India anyway.
Think about what a dollar-based investor is being asked to accept for that gap. Currency risk, since they earn rupees and report in dollars. Country risk. Lower liquidity. A year ago they were paid about 2.36 points a year for taking all of that. Now they are paid about 1.90.
Nothing about any Indian company changed. The price of holding Indian assets did.
That is the mechanism, and it applies to equities as much as bonds, because the same allocation committees decide both.
Four things this changes for you
1. Foreign selling is real, and it is being absorbed
Depository data published on 27 September showed net foreign portfolio outflows from Indian equities of ₹17,131 crore in September. Over the same period, from 1 to 25 September, domestic institutions bought a provisional ₹52,617 crore in the cash market, mostly mutual funds funded by systematic investment plans. Domestic money bought roughly three rupees for every one that left. That is why the fall has been a grind rather than a crash, and it is the single most useful thing to understand about FII vs DII flows this year.
2. The outflow headline hides two opposite trades
That ₹17,131 crore net figure is made of ₹25,682 crore of selling on the exchanges, offset by ₹8,551 crore put into primary market issues. So foreign investors sold listed Indian shares and bought Indian IPOs in the same month. Read the net number alone and you miss that entirely.
3. Your domestic discount rate is rising too
India's 10-year yield closed at 7.1194% on Friday, a sixth consecutive weekly rise. In the six weeks from 17 August it added 36 basis points, its longest rising streak in over a year. A higher risk-free rate at home lowers what any future stream of company earnings is worth today, whether or not a single foreign investor sells anything.
4. The rupee does the amplifying
The currency has been trading just under 96 to the dollar. For a dollar-based holder, a falling rupee subtracts from returns that were already thinner. This is the step that turns a moderate equity decline into a larger dollar loss, and it is why outflows tend to feed on themselves.
What to watch next, and when
The Reserve Bank of India's Monetary Policy Committee meets from 5 to 7 October. It has held the repo rate at 5.25%, but the market has moved to pricing a possible increase, a full reversal from the cutting cycle of 2025. Inflation has climbed from 2.75% in January to 4.82% in August.
Three other things are worth tracking, in rough order of importance.
Crude, because it feeds the rupee, the import bill and inflation at once, and has been swinging between roughly $98 and $105 a barrel.
The Fed's next decision, since another hike would widen the gap further in the wrong direction.
Government bond supply at home. The RBI is running a ₹1 trillion open market sale programme to drain surplus liquidity, and heavy auction supply pushes domestic yields up on its own.
