Should the yields continue to rise, it could be worrisome for our debt and equity markets, as we could see funds pull off in favour of US bonds. If the yields continue to rise on the 10 year US treasury and Indian interest rates fall, we could well see withdrawal from Indian debt as the interest rate gap narrows between the US treasury and the Indian debt.
Foreign institutions would prefer the safer US treasuries and that too without any currency risk. In 2013, these institutions were badly hit as the Indian currency depreciated against the US dollar.
It's also not good for Indian stock markets, as there could also be a shift from Indian equities to US treasuries, should they rise to the 3.5 per cent or 4 per cent levels.
It's possible that US treasuries may continue to rise, as the Fed begins its tapering of QE3. To read more on QE3 click here. Should that happen one should not expect a large scale foreign fund flow into the Indian stock markets.