Global interest rates are rising: Will RBI rates, home loan EMIs and investments be affected?

Globally, interest rates are headed northwards, and clearly so. The United States (US) 30-year Treasury bond yield is at a 19-year high. Japan 10-year government bond yield is at a 30-year high. Technically, bond yields and interest rates are different. Bond yields are traded levels in the secondary market. Interest rate, as administered by the country’s central bank, is the overnight rate at which it lends to banks when required. For people, interest rates are usually bank deposit or lending rates. Having said that, high bond yields are a precursor or a message. Bond yields have risen due to central bank rate hikes, expected rate hikes, or high government debt levels. Let’s look at the global picture and its impact.

Who’s raising rates, who isn’t?

The US is the bellwether economy and market for the world. Its outstanding government debt exceeds $40 trillion, which is enormous. As a percentage of the gross domestic product (GDP), it is nearly 126%, largely because of the sheer size of the economy. If its economy were smaller, the percentage would be higher. The servicing cost of the debt, that is, interest payout, is more than $1 trillion per year. The fact that the 10-year government bond yield is on the higher side and the 30-year yield is at a 19-year high shows the market’s reluctance to buy more government bonds. The market would buy more government bonds, but at a higher yield. This has forced Treasury Secretary Scott Bessent to buy back some long-maturity bonds.

As for the US Federal Reserve interest rates, rate cuts through December 2025 are long gone. Now the market expects rate hikes going forward, subject to the constraint of high servicing costs. Bond yields also move in reaction to rate-hike expectations, apart from the US Treasury supply.


In Japan, the government has piled up a lot of debt in a desperate attempt to boost GDP growth. Government debt is more than double its GDP. Their bond yields are rising on rate hikes by the Bank of Japan (BoJ), expected further hikes, and the government is suing more bonds for the market to buy. The BoJ has already raised its overnight interest rate from minus 0.1% to 1% and is expected to raise it further. This creates a different risk for global equity markets. Yen carry trade has been popular for a long time. Since interest rates in Japan are low, trading institutions can borrow the currency at cheap rates and deploy it in other markets, such as the US. Returns from the investment, net of the funding cost (which is low anyway), would be a net gain. As long as the yen depreciates, it would add to returns, and vice versa. Going forward, from an equity market perspective, watch interest rates in Japan, the attractiveness of the yen carry trade, and the yen’s movements vis-à-vis the US dollar.

For the European Union (EU), we have used German bund yields (German name for bond) as a proxy, as there is no Euro zone yield curve, and Germany is the frontline economy in the region. Yield levels have moved up palpably. The main reason is expectations of a rate hike by the European Central Bank (ECB). The debt level in Germany is not as high, but there are other EU members with high debt, like Greece and Italy.

In China, government bond yields, as well as the People’s Bank of China’s (PBoC) interest rates, have not risen. Among major global economies, China is an outlier in that sense. However, its debt level is high. Despite that, bond yields have not risen. This is what is referred to as ‘financial repression’, that is, keeping interest rates low through regulation.

In our country, the Reserve Bank of India’s (RBI) rate cuts from February to December 2025 are now history. Now, the market is looking at rate hikes. Our 10-year government bond yield is on the higher side, reflecting the possibility of a rate hike. If, and when, hikes happen, it would be a shallow rate-hike cycle, say two rate hikes of 25 basis points each. The RBI’s inflation projection of 5% for 2026-27 is tolerable. The debt level, at 83% (see table), includes state-level debt. Like the central government, state governments too run budget deficits, and the 83% figure includes both.

How rates & yields have moved

The India playbook

The impact has multiple aspects.

*Interest rate: As per theory, and the belief of a section of the market, high global interest rates put pressure on the RBI to hike interest rates. The notion is correct, but it has to be seen in perspective. The RBI’s primary criteria for interest rate decisions are India’s inflation and GDP growth. After these, come global developments. The RBI’s inflation projection of 5% for 2026-27 is tolerable. It would be a shallow rate-hike cycle, despite global interest rates heading northwards. A lot is being made of the interest rate differential between the US and India, and the narrow differential is thwarting foreign portfolio investors (FPI) investing in bonds. FPIs own only 3% of outstanding government bonds, even less in corporate bonds. This, per se, is not a driver of the RBI’s interest rate calls.

*Your investments: High interest rates are not a positive for either equity or bond markets. That said, what has been discussed so far is already known to markets. Incremental impact, as and when rate hikes happen globally and in India, would be adverse, but limited. If you are investing abroad in bonds through the Liberalised Remittance Scheme (LRS), you can lock in higher yields as and when bond yields move up.

*Loans: Loans would get costlier if and when the RBI hikes interest rates. In floating-rate loans, equated monthly instalments (EMIs) would rise even for existing loans. However, as mentioned above, the RBI’s next rate-hike cycle would be shallow. High global bond yields or interest rates matter for the RBI, but they are not the decisive factor.

*FPI investment: Theoretically, FPIs would not invest in India or invest less if interest rates are higher abroad, as it gives them a better alternative. Practically, equities and bonds are different buckets. FPIs have sold Indian equities since October 2024, when global interest rates were relatively lower, as they were chasing theme-based investments. Now, global interest rates/yields are higher, but FPIs have turned into net buyers of Indian equity in the recent past.

The Author is Corporate Trainer (Financial Markets)