Article 3: Global capital is no longer cheap, that’s the challenge

Why in news: Government bond yields in major economies have reached multi-decade highs, reflecting rising borrowing needs, inflationary pressures and competition for capital. This could make global financing more expensive for India.

Key Details

• Rising yields: Bond yields have increased sharply in the U.S., France and Japan, signalling higher borrowing costs for their governments.
• Fiscal pressures: Large government deficits are being driven by ageing populations, welfare spending, defence requirements and limited scope for higher taxation.
• Inflation risks: War-related and weather-related supply disruptions can raise commodity prices, encouraging central banks to maintain or increase interest rates.
• AI investment: Large technology companies are borrowing heavily to finance AI infrastructure, increasing competition between governments and corporations for available capital.
• India’s challenge: Higher global yields could increase the cost of foreign capital, making fiscal discipline and avoiding excessive government borrowing important for India.

Surge in Government Bond Yields

• 10-year US and French bond yields rose to 5.34% and 4.99%, their highest levels since 2002.
• Japan’s 10-year yield crossed 3.1%, its highest since 1996.
• The rise in borrowing costs for these economies over the past year was around 1.2–1.4 percentage points.
• India’s 10-year government bond yield rose by about 0.7 percentage points to 7.21%.
• Higher yields mean governments must offer greater returns to attract investors.

Persistent Fiscal Deficits

• Developed economies are facing growing fiscal pressures due to:
  • Ageing populations
  • Higher social welfare spending
  • Rising defence expenditure
  • Resistance to higher taxes or cuts in benefits
• Large government borrowing increases the supply of bonds, potentially pushing yields higher.
• The US public debt has crossed $40 trillion, highlighting the scale of its fiscal challenge.
• Rising interest payments further increase the burden on government finances.

Inflation and Geopolitical Risks

• War and weather-related supply disruptions have contributed to commodity inflation.
• Persistent inflation can encourage central banks to keep interest rates high or signal further increases.
• Higher policy rates generally increase the yields demanded by investors on long-term government bonds.
• Investors therefore increasingly demand compensation for inflation and fiscal risks.

AI Investment and Competition for Capital

• Major technology companies are undertaking massive investments in AI infrastructure.
• Capital expenditure by Meta, Microsoft, Amazon and Google was about $410 billion in 2025.
• It is projected to rise to around $725 billion in 2026 and more than $1.1 trillion in 2027.
• A significant portion of this investment is being financed through debt markets.
• Competition between governments and large technology companies for investor funds can push long-term bond yields higher.

Implications for India

• Global capital may no longer remain cheap and easily available.
• Higher global yields can increase the cost of external financing for Indian companies and the government.
• Indian policymakers need to maintain fiscal discipline.
• Excessive government borrowing could crowd out private-sector borrowing.
• Maintaining credible public finances is therefore important for keeping borrowing costs and financial risks under control.

Conclusion

Higher global borrowing costs indicate that the era of abundant and inexpensive capital may be weakening. India must therefore maintain credible fiscal management while encouraging productive private investment. Prudent government borrowing, stable inflation and deeper domestic financial markets can reduce vulnerability to external shocks. Maintaining investor confidence will be crucial for financing India’s infrastructure and long-term development needs.

Descriptive question:

Rising global bond yields can affect emerging economies such as India through capital flows, borrowing costs and exchange-rate pressures. Discuss the implications and suggest suitable policy measures. (150 words, 10 marks)

Source: The Indian Express