The benchmark for the global cost of capital, ten-year Treasury yields, has surged by approximately 30 basis points this week. This increase has been mirrored in bonds across the globe.
According to a Reuters report, when bonds are paying so much more in interest, they pull investment dollars away from stocks and other investments prone to bigger price swings than bonds.
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The 30-share BSE Sensex plunged 533.13 points to 64,978.97. The Nifty declined 153.35 points to 19,375.40. Among the Sensex firms, NTPC, Axis Bank, IndusInd Bank, Maruti, UltraTech Cement, ICICI Bank, Tata Steel and Bajaj Finserv were the major laggards. Nestle, Hindustan Unilever, HDFC Bank and
RBI typically conducts six bi-monthly meetings in a financial year, where it deliberates interest rates, money supply, inflation outlook, and various macroeconomic indicators. According to SBI Research, the Indian central bank is expected to yet again pause the key repo rate this week. RBI in its
High yields also make borrowing more expensive for companies and households across the economy, which can hurt corporate profits.
Investors increasingly are taking the Federal Reserve at its word that it will keep its main interest rate high for a long time in order to drive down inflation. The Fed has already yanked its federal funds rate to the highest level since 2001, and it indicated last month it may keep the rate higher in 2024 than it earlier expected.
“Global cues are negative for markets in the near-term. The sustained rise in the US bond yields, which has triggered continuous FII selling, is showing no signs of abating. The dollar index is now clearly above 107 and the US 10-year bond yield is at 4.83 per cent. This means FIIs will continue to sell and the bulls will be on the back foot,” V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.
Sustained FII selling
According to some analysts, pessimistic foreign investors have further intensified the pressure on domestic stocks.
In September, foreign portfolio investors (FPIs) broke a six-month streak of buying, selling shares worth 147.68 billion rupees, as per official data. Additionally, FPIs have consistently been net sellers in the past nine trading sessions. On Tuesday alone, Foreign Institutional Investors (FIIs) unloaded equities worth Rs 2,034.14 crore, according to exchange data.
“Consolidation continued given the rising US bond yields and dollar index, prompting FIIs to pull funds. While the moderation in oil prices may provide respite on the downside. Infrastructure activity indicates an acceleration led by the rise in core sector output. Auto stocks declined due to mixed bag monthly data, while a near-normal monsoon will aid positive sentiment for consumption in the near term,” Vinod Nair, Head of Research at Geojit Financial Services, said.
Caution over RBI’s MPC meet
The Reserve Bank of India (RBI) commenced its three-day bi-monthly Monetary Policy Committee (MPC) meeting on Wednesday. Financial market participants are keenly observing the outcome and the central bank’s policy stance.
RBI typically holds six bi-monthly meetings in a financial year, during which it discusses interest rates, money supply, inflation forecasts, and various macroeconomic indicators. According to a report by SBI Research, it is anticipated that the Indian central bank will maintain the key repo rate during this meeting.
All but one of the 71 economists surveyed by Reuters in late September said the RBI would keep its key repo rate unchanged at 6.50% at the conclusion of the Oct. 4-6 meeting, with one expecting a 25 basis point hike.
“Even as the worst of inflation is behind us and core retail prices are on a downward journey, we would still expect the RBI to maintain a bit of hawkishness on inflation dynamics, given various uncertainties such as climate conditions, commodity prices and global risk positioning,” Yes Bank economists Indranil Pan and Deepthi Mathew said in a note.
However, investors prefer to play it safe before the outcome of the RBI’s MPC meeting. “Investors preferred to shun their equity exposure ahead of the monetary policy committee meeting this week. Markets were in weak terrain through the session, as traders trimmed their holding in automobile, oil & gas and metal shares. The stronger dollar once again weighed heavily on the rupee, which indicates that foreign investors may have once again pulled the plug on Indian equities.
“Even the robust September GST collections failed to enthuse investors as global worries continue to dictate the trend on local markets,” Shrikant Chouhan, Head of Research (Retail), Kotak Securities Ltd, said.
What should investors do
“Investors should hold their horses and be extremely stock-specific amid global macro uncertainty” Satish Ramanathan, chief investment officer – equity at JM Financial Mutual Fund, told Reuters. “It is time for investors to trim allocations in small- and mid-caps”, he said.
“It is safer to shift to large-caps, at least for the time being,” Ramanathan added.
(With inputs from agencies)
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