A combination of moderation in interest rates in the US in the last one year and lower oil prices had lifted the sentiments on Indian equity markets, creating the basis for the current rally.
This tailwind is likely to come to an end as 10-year bond yields in the US are up nearly 20 basis points from their lows in March. Higher bond yields reduce attractiveness of Indian equity and could dampen incremental inflow of foreign portfolio investments.
This could put a ceiling on rise of benchmark indices. Also, an increase in oil prices will result in higher current account deficit (CAD) for India, besides increased input costs and lower margins for companies.
Higher CAD means the rupee could once again come under pressure, much to the dislike of foreign investors. This will make equity investing expensive for foreign investors, moderating incremental FII inflows that could put brakes on the current rally and moderate returns for investors.