Why US bond yields at 4.28% won't unlock a foreign capital wave into India

pension funds, and large asset managers, allocation decisions are not driven solely by nominal yield spreads.The calculus is more rigorous: risk-adjusted returns in dollar terms. A US Treasury at 4.28% offers a risk-free, USD-denominated return.

To justify moving capital into India, a foreign portfolio investor must believe that India's expected equity returns, after accounting for INR depreciation against the USD and the India risk premium, will deliver meaningfully superior returns in dollar terms.At current levels, that threshold is difficult to clear. The opportunity cost of moving out of US Treasuries remains high.

Until we see US yields compress more aggressively (closer to the 3.5% range or below) the urgency for global capital to rotate into emerging markets like India will remain limited.Capital allocation into Indian equities is a function of three variables: earnings growth visibility, starting valuations, and the taxation framework. On all three counts, India currently faces headwinds.

Earnings momentum, while improving at a broader level, 456 companies in our tracking universe showed revenue growth of 11.6% YoY and PAT growth of 15% YoY, has not yet translated into the kind of earnings surprise cycle that compels foreign re-rating.India also remains one of the most expensive equity markets globally, which structurally increases downside risk for a dollar-denominated investor. The taxation framework for FPIs adds another layer of friction, and capital gains structures that are less favourable than those in peer markets act as a quiet but persistent deterrent to sustained foreign participation.On the debt side, the story is similarly subdued.