The US 10-year yield slipped below 2 per cent after the US Federal Reserve Board scrapped its use of word patient in describing its approach to policy change.
With this, the spread between Indias earnings yield, which is the inverse of the price-earnings multiple, and the US bond yield is now 3.35 per cent compared with the 10-year average of 3.51 per cent, according to Bloomberg data.
The higher spread reflects attractiveness of equities over bonds.
This is likely to support the valuations of Indian equities.Typically, when the earnings yield is higher than the bond yield, fund managers tend to allocation from bonds to equities.
Consequently, this results into re-rating of equities.
At 18.8 times of the one-year forward earnings, the Indian market is among the most expensive globally.Foreign investors looking for investment in the emerging markets observe the spread between a countrys earnings yield and the US bond yield.During monetary easing by the US after the financial crisis in 2008, the spread between Indias earnings yield and US 10-year bond yield was between 3.8 per cent and 6.9 per cent in the five years to 2016.The US Federal Reserve futures indicates four interest rates cuts each of 25 basis points in the current year.
In addition, the worlds largest fixed fund manager PIMCO said that the US Fed may cut rates by 50 basis points in the next six weeks.
This will further support equity valuation.Foreign portfolio investors have invested nearly $11 billion in equities in 2019 so far, the highest amount in the comparable period of each of the past six years.