The recent surge in the US 10-year Treasury yield above the 5% mark has triggered foreign portfolio investor (FPI) outflows of ₹75,000 crore over the past 13 days, according to Jayesh Mehta, Vice Chairman and CEO at DSP Finance. Addressing the macroeconomic environment, the executive noted that India relies on equity flows for growth capital rather than debt. With total government securities (GSEC) investments at ₹3,25,000 crore and recent selling reaching almost ₹3,00,000 crore, the country is effectively exporting dollars.
While crude oil prices at $100 per barrel remain manageable as long as credit spreads are higher, the flight of foreign capital poses a more severe threat. To counter this stress, structural reforms are necessary, specifically aligning FPI taxation with the source-based model adopted for GSECs. "April 1, 2026, we changed the GSEC taxation for FPIs to be source-based, where they pay the tax in that country, not in India," Mehta explained.
"I think we are the only country in the top 10 economy which is charging in India rather than source-based. I think we need to change that. At least small pain points can be removed when we are in stress." On the currency front, the rupee opened approximately 1% stronger, with the dollar-rupee rate quoted at 95.86 compared to a previous close of 96.73.
Recent Reserve Bank of India (RBI) measures have steepened the forward curve, making it expensive for speculators to buy dollars. Despite market chatter suggesting a 150-basis-point increase to defend the rupee, domestic interest rates should focus strictly on inflation. The currency differential is already being addressed by an expensive 8% forward rate, which naturally encourages exporters to sell dollars.
However, stricter controls on the offshore Non-Deliverable Forward (NDF) market are still required. While the central bank has restricted banks from onshore-offshore arbitrage, corporate participation remains a loophole. "We still allow corporates to do it.
We just started a few years back. We should just stop it," Mehta said, adding that the RBI should also cease its own interventions in the NDF space. "When you allow this leakage to onshore-offshore... the offshore guys can easily buy and we are actually making that market liquid." A liquid offshore market allows speculators to take directional calls against the rupee, exacerbating pressure during times of stress.
By confining corporate currency trades to the domestic market, policymakers can effectively close the window on offshore speculation. Watch the full conversation here US yield above 5% triggers ₹75000 crore FPI outflow, says DSP Finance's Jayesh Mehta Addressing concerns about the size of the forward book, which stands at roughly $60-100 billion including swaps, the situation remains manageable. Future NDF trades are cash-settled, while onshore trades require delivery.
Ultimately, the trajectory of global asset classes hinges on the US bond market. While hedge funds and asset managers remain divided on whether rates will rise or fall, elevated yields remain the primary headwind. "At this juncture, I at least know that if it goes higher, it's a problem for all of us," Mehta concluded.
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Source: CNBC TV18
