On Monday, stock market and the rupee declined, while bond yields hardened for a second straight day over growing concerns that the Reserve Bank of India (RBI) might increase interest rates again in the near future to rein in persistently high inflation.
Bond yields rose as traders sold their portfolio ahead of an auction, while month-end dollar demand weighed on the rupee. The Indian currency weakened 35 paise to 62.60 a dollar, while the benchmark 10-year bond yields increased 27 basis points to 8.85 per cent, the most in almost a month.
Some of the government securities on offer had to be bought by the underwriters of the auction as investors sought higher interest rates, which RBI was not ready to give.
Rate-sensitive stocks, especially banking ones, led the fall in equities, with State Bank of India dropping 5.4 per cent and ICICI Bank 4.4 per cent. Global markets also traded weak, though the quantum was far less intense than in India.
Falling for a second straight day, the BSE Sensex ended 362.75 points, or 1.8 per cent, lower than its previous close at 19,900.96. The NSE Nifty declined 122.35 points, or two per cent, to 5,889.75.
In a surprise move, RBI Governor Raghuram Rajan had on Friday raised the key policy rate by 25 basis points, while emphasising the need to bring down inflation.
Experts said investors had dumped stocks on assumption that there were further hikes in the offing. “We are expecting more hikes in the near term. It may not be sharp but the probability, clearly, cannot be ruled out,” said Tirthankar Patnaik, India strategist and chief economist, Religare Institutional Research.
The index tracking the banking sector was the worst performer among over a dozen sectoral indices, extending its fall to nearly eight per cent in two days.
“Probably, we could go down in short term. Global events are not looking great. Fed tapering could happen as early as October. Fundamentally, things are weak domestically and interest-rate-linked companies could suffer,” said Ambit Investment Advisors CEO Andrew Holland.
Institutional investors, especially domestic ones, were seen selling heavily on Monday. Domestic institutional investors (DIIs) sold shares worth Rs 745 crore in the cash market, while overseas investors sold to the tune of Rs 81 crore, according to provisional data.
However, some market players said the two-day correction was expected, given the way the market had rallied since the start of this month.
“The euphoria after the Fed committee meeting has fizzled out. The market had seen a good rise. They have given back some of their gains. The market will be watching the next inflation number and also what happens with the Fed taper,” said Holland.
The Indian market had gained nearly 15 per cent in just three weeks before RBI’s policy review put the brakes on the rally.