Mumbai's benchmark Sensex dropped 548 points on Monday, reversing Friday's rally as a spike in Brent crude, record foreign investor outflows and a jump in bond yields outweighed an early boost from a stronger rupee.
The 30-share index closed at 72,472.33 territory after shedding 548 points, giving back much of Friday's 879-point gain. The Nifty had rallied 288.65 points, or 1.30 per cent, to 22,520.45 on Friday before the reversal set in.
Why did Indian markets fall on Monday?
Three pressures converged. Brent crude, the global oil benchmark, jumped 1.14 per cent to USD 105.8 per barrel, renewing concerns about India's import bill. Foreign institutional investors offloaded equities worth Rs 3,568.90 crore on Friday, according to exchange data. And the 10-year bond yield climbed to a three-year high.
“Indian markets failed to hold on to early gains as sentiment weakened amid a rise in the 10-year bond yield to a three-year high and continued FII outflows driven by external uncertainties,” said Vinod Nair, Head of Research at Geojit Investments Limited.
Which stocks led the decline?
ITC was the biggest Sensex loser, down 3.23 per cent, followed by Tech Mahindra (-3.1 per cent), Hindustan Unilever (-2.1 per cent), Larsen & Toubro (-1.87 per cent), State Bank of India (-1.78 per cent) and Tata Consultancy Services (-1.67 per cent). Bharat Electronics, Mahindra & Mahindra, Kotak Mahindra Bank and HCL Tech were among the few gainers.
On the BSE sectoral front, Hospitals fell 2.04 per cent, FMCG 1.34 per cent and PSU Bank 1.05 per cent, while Housing Finance rose 1.86 per cent and Capital Goods 1.31 per cent. Notably, the broader market advanced: the BSE SmallCap Select index jumped 1.65 per cent and the MidCap Select index gained 0.66 per cent.
The rupee factor and RBI intervention
The rupee soared nearly 1 per cent, or 93 paise, to close provisionally at 95.78 against the US dollar, supported by central bank measures. On Saturday, the Reserve Bank of India tightened rules governing forex derivatives trades to curtail speculative bets against the currency and asked banks to create a 20 per cent reserve for dollar purchases above USD 2 million.
That support came at a cost. “Concerns that the RBI's latest measures to support the rupee could tighten banking-system liquidity weighed on financials,” said Hariselvan Radhakrishnan, Founder and CEO of HST Wealth. Nair noted that banking stocks led the decline after the RBI raised the daily cash reserve ratio maintenance requirement to absorb surplus liquidity.
Inflation and the rate outlook
Retail inflation rose to 5.54 per cent in September, the highest under the new consumer price index series, driven mainly by costlier food items, according to official data released after market hours on Friday.
“Amid continued stickiness in commodity prices and rising global yields, we expect the RBI to continue to remain firmly on a path of rate hikes. We see another 2 hikes from the RBI this financial year,” said Garima Kapoor, Deputy Head of Research and Economist at Elara Capital.
Global backdrop
Asian markets were mixed to weak: South Korea's Kospi dropped 3.65 per cent and Shanghai's SSE Composite settled lower, while Hong Kong's Hang Seng ended marginally higher. European markets traded higher and US markets closed higher on Friday.
Ajit Mishra, SVP of research at Religare Broking, said elevated global bond yields, escalating geopolitical tensions and persistent foreign fund outflows remain the major headwinds for Indian equities.
What does this mean for investors?
For now, the divergence between a resilient broader market and a weakening large-cap index suggests investors are rotating away from rate-sensitive sectors and index heavyweights. With crude above USD 105, inflation at 5.54 per cent and two further rate hikes expected this financial year, analysts see volatility persisting until foreign outflows stabilise and the rupee finds a durable footing.