India may need to rely more on exports and long-term investment flows to fund its growth as the gap between Indian and US interest rates narrows, according to a report by SBICAPS.

The study says the country’s traditional advantage of offering significantly higher returns than developed markets is shrinking, which could make it harder to attract the same scale of foreign capital used to finance current account deficits in the past.

The research notes that India’s economic fundamentals remain relatively stable, supported by anchored inflation, gradual fiscal consolidation and an improving sovereign credit profile.

As a result, domestic interest rates are unlikely to rise as sharply as those in the US. However, a lower interest-rate differential could reduce the attractiveness of Indian debt for global investors.

The backdrop to this shift is a structural rise in US bond yields. According to the report, the era of ultra-low interest rates that followed the Global Financial Crisis (GFC) appears to be over, with US Treasury yields moving higher due to inflation, large fiscal deficits and changing global investment patterns.

Around 75-85 per cent of the increase in yields since 2020 has been driven by inflation and aggressive monetary tightening, but the report argues that a more lasting increase in real interest rates is now underway.

Factors such as persistent US government borrowing, increased Treasury issuance, productivity gains from artificial intelligence and a gradual diversification away from dollar assets are pushing up the US economy’s “natural rate of interest”, the study said.

For India, the key implication is not necessarily higher borrowing costs but a change in external financing dynamics.

With India’s inflation premium over the US narrowing over the past decade, yield spreads between the two countries have compressed. In such an environment, India may have to depend more on export competitiveness, stable equity inflows and adequate foreign exchange reserves to maintain external sector stability.

In effect, SBICAPS believes the global shift in interest rates could require India to gradually move away from a growth model heavily supported by foreign capital inflows and place greater emphasis on exports and sustainable investment-led growth.

Published on November 10, 2026