Rising crude oil prices have become the single largest threat to financial markets, with Shrikant S. Chouhan, Head of Equity Research at Kotak Securities, warning on Monday, 18 May that the combination of elevated energy costs, surging bond yields, and persistent foreign fund outflows is creating a challenging environment for equities globally and in India.

Crude Prices Climb Further

Chouhan noted that crude oil prices have shown no signs of relief, having risen by approximately $2–$3 per barrel over the preceding weekend alone. He cautioned that if prices sustain in the $105–$110 per barrel range, the impact on the broader global economy could intensify significantly. 'As long as crude prices remain high, inflation concerns will continue to dominate global markets,' he said.

Bond Yields Surge to Exceptional Levels

A direct consequence of persistent inflationary pressure, according to Chouhan, is the sharp rise in US bond yields. He pointed to a significant surge last week across 10-year, 20-year, and 30-year US Treasury maturities. 'These bond yields are now moving towards exceptional levels. Whenever such a trend emerges, bond markets start attracting large investments,' he said. Higher returns on developed-market debt typically draw capital away from riskier emerging-market assets, including Indian equities.

FII Outflows and Pressure on Indian Markets

Chouhan linked persistent selling by foreign institutional investors (FIIs) directly to rising global uncertainty and elevated crude oil prices. As global investors rotate towards safer instruments in markets such as the United States and Japan, emerging economies face the dual pressure of capital outflows and currency depreciation. He noted that higher crude prices are already weakening currencies across import-dependent economies. Against this backdrop, he expects Indian equity markets to remain range-bound in the near term.

The Compounding Effect on Emerging Economies

The stress is not limited to equity valuations. Chouhan highlighted that energy-import-dependent nations — a category that includes India — face a compounding challenge: costlier crude widens the current account deficit, weakens the domestic currency, and pushes up domestic inflation simultaneously. This comes amid an already fragile global macro environment, where central banks in developed markets are maintaining a hawkish posture. Notably, this is not the first time crude-driven volatility has rattled Indian markets; similar dynamics played out during the 2022 energy price surge following geopolitical disruptions.

What Markets Are Watching Next

'The combination of expensive crude oil, rising bond yields and continued foreign fund outflows is creating a challenging environment for equity markets globally as well as in India,' Chouhan noted. Market participants will be closely tracking any movement in crude benchmarks, the trajectory of US Treasury yields, and weekly FII flow data for signals on whether the pressure eases or deepens in the sessions ahead.