International government bond yields are rising at a rate unparalleled in years and the jitter has come here much sooner than traders were anticipating. The nation's top 10-year government bond also rose this week, settling near 6.95-6.96 percent, after closing at its highest level in almost a dozen weeks, fueled by a "sell the note" push that began thousands of miles away at the trading desks in New York and London.

The "immediate" cause is now well known. The US Treasury market has been on a downward trend since earlier this year when Kevin Warsh assumed control of the Federal Reserve, with investors predicting that the central bank will be more aggressive than they priced in when it comes to fighting inflation. The benchmark U.S. 10-year note has been circling 4.7 percent and the 30-year bond briefly touched pre-2008 financial crisis levels. But within a single week, the odds of a September rate hike jumped from around 40 percent to nearly 57 percent as the Fed's own statement on Jackson Hole made it abundantly clear that price pressures are “now not meaningfully slowing.” Such a repricing doesn't remain within the U.S. borders. It alters the arithmetic of all emerging markets that are contenders for global investment, India included.

Crude oil is then added on top. Brent has been on a steady upward path to near the 90-dollar mark which is important to an economy that imported nearly 89 percent of its crude needs in the previous financial year. In the past, the Reserve Bank of India itself has estimated that for every 10-dollar increase in a barrel of crude, headline inflation increases by nearly 49 basis points, depending on the percentage of the increase that gets passed on at the pump and on the rupee's performance.

The bond market in Mumbai has been so volatile, it can be summarized by that one number. But traders are not just buying or selling because of what the Fed does; they're pricing in the possibility the Fed's own rate-setting committee may have to give up its “accommodative policy” sooner than expected. Minutes from the August meeting of the central bank have already indicated that policymakers will not hesitate to take action if inflation risks widen, and that one sentence has been sufficient to keep yields high over the past few weeks.

In financial commentary, when all global bond sales are down, they are down and it's a crisis.Financial commentary has a reflex reaction to every time global bond sales are down it is a five-alarm fire for emerging economies, and it needs a little bit of correction. The current macro stance in India is indeed stronger than that in 2013, when the taper tantrum gripped the country, and more than 2020, which saw a massive outflow during the pandemic. Indian government debt is only lightly held by foreigners, which restricts the ability to sell it off in large amounts in an orderly manner, unlike in many more open bond markets in Southeast Asia.

Most importantly, the Central bank has been secretly providing for a cushion. Even if external commercial borrowings and other external inflows are included, the total inflows of foreign currency into the non-resident deposit scheme is around 136 billion dollars against a target of about 90 billion dollars. This is actual ammunition! It has already been used to increase liquidity in the banking system, thereby keeping demand robust for shorter-duration government paper with the longer end of the curve wobbling.

In no way does this imply that the discomfort is an aesthetic issue. Higher sovereign yields mean higher interest rates the government will have to pay on its own bond issue, and consequently on every corporate bond a bond buyer is comparing with the 10-year paper. Another way that yields rising on bank balance sheets puts upward pressure on their mark-to-market accounts is by influencing the willingness of banks to extend credit to the rest of the economy. The second order effects of a more expensive government bond market on equity valuations are also not in the Indian investor's favor, as the bond market offers a risk-free instrument yielding close to 7 percent, while an American Treasury is paying almost as much, yet without currency risk.

The better path to take this moment is not as a solely Indian problem, but rather as the next step in a much bigger reckoning taking place in the sovereign debt markets of the world. The annual interest payments on the debt of the United States are more than a trillion dollars a year, and the country is carrying debt of nearly one and a quarter times its gross domestic product.

Japan has been selling off its massive Treasury stock to shore up the yen, among the world's many gluttons of paper. Every other government, including India, pays a spread on top of the higher rate of interest paid by the world's most credit worthy borrower. But that arithmetics can't be overturned by growth, despite how strong India's GDP print for the June quarter may be.

What the country needs is room: room to deal with a heavier interest bill without panic, room to allow the currency to take the strain instead of having to turn U-turn with a policy change, and room to regard this sell-off as a financing-cost matter to deal with instead of a crisis to be feared. Over the next few months, it will be much more important to whether that room is used judiciously than to what goes on in the bond pits in Mumbai or New York on one trading day.