Sensex falls 548 points as bond yields climb, despite rupee's best day since April

Indian shares closed lower on Monday even as the rupee posted its biggest one-day gain in six months, as rising bond yields and steady foreign selling outweighed relief from the Reserve Bank of India’s weekend steps to defend the currency.

The Sensex ended 547.65 points, or 0.76%, lower at 71,924.68, and the Nifty 50 fell 157.10 points, or 0.70%, to 22,363.35. The day began on a firm note: the Sensex opened nearly 300 points higher and touched 72,884 before sellers took over, dragging it to a low of 71,845.

Smaller companies bucked the trend. The Nifty Smallcap 100 rose 1.42% and the Midcap 100 ended flat.

The rupee bounces

The rupee closed at 95.78 against the dollar, up 93 paise from Friday’s close of 96.71. It opened at 95.61 and held most of its gains through the day. It was the currency’s biggest jump since April, after it neared a record low of 97 last week.

The RBI announced on Saturday that it would meet the full daily dollar needs of Indian Oil, HPCL and BPCL through a special window, taking a large chunk of demand out of the market. It also tightened rules on rupee derivatives. Banks must now keep 20% of the rupee value of certain foreign exchange contracts above $2 million with the RBI in cash, and the limit for contracts without an underlying exposure has been cut from $100 million to $5 million.

Madhavi Arora, lead economist at Emkay Global Financial Services, called the measures “tactical fixes, not structural solutions”, saying they should curb speculation and offer the rupee some near-term support.

Defending the currency has been costly. Foreign exchange reserves fell by $12.95 billion to $734.61 billion in the week to 2 October.

Why stocks fell anyway

Bond markets told a different story. India’s 10-year government bond yield rose 8 basis points to 7.38% during the day, its fourth straight daily rise, after the RBI raised the repo rate to 5.50% last week and said banks must hold 99% of their required cash reserve every day from 16 October.

FMCG, bank and IT stocks led the losses. ITC, Hindustan Unilever and Tech Mahindra were among the biggest drags, with Hindustan Unilever touching a 52-week low during the session. Larsen & Toubro and Apollo Hospitals also fell, and the Nifty PSU Bank index lost 1.18%. Dr Reddy’s, Bajaj Auto and Bharat Electronics gained, and media stocks jumped 4.60%. The India VIX, a gauge of expected volatility, rose as much as 8.1%.

Foreign investors sold shares worth a net ₹1,708.48 crore on Monday, according to provisional exchange data, after net sales of ₹3,568.90 crore on Friday.

Anand Shah, chief investment officer for PMS and AIF at ICICI Prudential, warned in a monthly note that “companies with excessive leverage may face heightened balance sheet risks as funding costs rise.”

What comes next

After the market closed, data showed retail inflation rose to 5.54% in September from 4.83% in August, driven by food prices. Ashish Rajodiya, head of commodities at PL Capital, had said before the release that “softer data and cooler crude would give the rupee room to test the 94.90 support.” US inflation data follows on Wednesday.

HCLTech reported a 21% rise in July to September profit on Monday and raised the lower end of its revenue guidance. Brent crude stayed above $105 a barrel.