Domestic equities fell on Monday as investors assessed the Reserve Bank of India's latest measures to support the rupee by curbing spot and forward dollar demand, with the 30-share Sensex erasing opening gains to close down 547.65 points, or 0.76 per cent, at 71,924.68. The Nifty 50 declined 157.10 points, or 0.70 per cent, to settle at 22,363.35, falling as much as 796.23 points during the session. Banking stocks bore the brunt of the pressure, shedding a combined ₹30,610 crore in market value and accounting for 38 points of the Nifty 50's decline, with State Bank of India falling 1.9 per cent and ICICI Bank losing 1.1 per cent. However, broader market indices bucked the trend, with the Nifty Midcap 150 rising 0.1 per cent and the Nifty Smallcap 250 gaining 1.13 per cent. The India Volatility Index, or Vix, rose nearly 6 per cent to 15.24, signalling heightened caution among investors.
The Reserve Bank of India has announced fresh measures to shore up the rupee, redirecting oil companies' dollar purchases away from the spot market and tightening hedging rules as the currency hovers near record lows. The central bank announced it will sell debt worth ₹25,000 crore ($2.58 billion) on Tuesday, while tightening norms of daily reserve maintenance for banks from October 16. According to a trader with a primary dealership, the benchmark 6.94% 2036 bond yield may trade in a 7.26-7.32% band, after ending at 7.2994% on Friday, with the 10-year benchmark potentially testing over 7.30% levels before the rupee measures provide overall calm to Indian assets. The rupee strengthened nearly 1 per cent to close at 95.78 against the dollar, despite the bond market pressure. The moves come just days after the central bank raised its policy rate and tweaked its stance to calibrated tightening, hinting at more hikes in coming months.
Government bonds came under heavy selling pressure, with the yield on the benchmark 10-year government bond jumping 9 basis points to 7.39 per cent, the highest since March 10, 2023. The RBI's measures to drain liquidity from the banking system directly, alongside foreign exchange operations that could indirectly reduce the surplus, added to pressure on bond prices. The resulting rise in yields signalled higher borrowing costs, weighing in turn on equity valuations, particularly in interest-rate-sensitive sectors. Market participants are also watching Tuesday's ₹25,000 crore government bond auction for signs of investor appetite amid rising yields. The 10-year government security yield stood at 7.21% in October, compared with 6.78% in August, with Axis MF expecting the 10-year G-Sec yield to remain in the 7.10-7.40% range for the rest of 2026.
Axis MF Research believes the near-term environment could remain challenging for bond yields as the RBI tightens both rates and liquidity. The report expects another 50-75 basis points of rate hikes in the near term, though the pace and duration will depend on crude prices, global bond yields, domestic inflation and growth. As reported by Mint, the research house prefers the 1-3 year segment, particularly high-quality corporate bonds, which offers favourable carry, adequate liquidity and a relatively attractive risk-reward profile. For investors seeking to lock into higher yields while limiting sensitivity to further rate increases, shorter-duration debt strategies could be more suitable than making aggressive bets on long-duration funds. Governor Malhotra emphasized that rate cuts were "off the table in the near term" during the MPC meeting, reinforcing the hawkish stance. Anuj Gupta, a SEBI-registered market analyst, predicts at least two more rate hikes in the current financial year, lifting the Repo Rate up to around 6%, while Prakhar Sharma from Jefferies expects consensus rate hike expectations to reach 75-100 basis points.
The RBI's policy decisions come amid elevated energy prices with benchmark Brent crude remaining close to the $106 per barrel mark, which could impact oil-import-dependent India's inflation trajectory and government finances. Retail inflation rose sharply to 5.54 per cent in September on the back of high onion and other food prices, remaining just within the RBI's tolerance band, government data showed. Sham Chandak, head of institutional equities at Elios Financial Services, said the decline was driven by renewed tensions in the Gulf involving the Houthis and Saudi Arabia, which added to concerns over oil prices. The Nifty FMCG index was the worst-performing sectoral gauge on Monday, falling 1.7 per cent, reflecting the broader pressure on equities from tighter liquidity conditions, rising borrowing costs and persistent inflation risks. A worsening El Niño and an underwhelming monsoon season could add to the pressure on the economy by weighing on water levels and food stocks.
