Indian stocks reel under global pressure in September; October rebound faces risks

Indian stock market indices had a rough run in September as higher US bond yields, rising crude oil prices and sustained selling by foreign investors weighed on equities. The weakness has also cast a shadow over the market's prospects for October, with brokerages expecting a possible technical rebound but warning that risks remain.

The benchmark Nifty 50 fell 6.7% during the September derivatives series, making it the worst-performing major Asian market. The Bank Nifty declined 5.7%, contributing significantly to the benchmark's losses.

The Sensex, meanwhile, has fallen around 5% since September 2.

A combination of global and domestic factors has weighed on Indian equities.

US bond yields trigger FII outflows
One of the major concerns for emerging markets has been the surge in US Treasury yields. The benchmark 10-year US Treasury yield remained near its highest level since 2007 at 5.23% in Asian trading and was headed for a rise of nearly 50 basis points this month, the biggest monthly increase in about two years.

Higher US bond yields make American fixed-income assets more attractive to global investors, putting pressure on emerging-market equities, such as India.

Foreign institutional investors (FIIs) have sold $2.7 billion worth of Indian shares in the spot market, the highest outflow in six months, according to Nuvama data.

Expectations of further rate hikes by the US Federal Reserve have added to the pressure. According to the CME FedWatch Tool, traders see a 47% probability of a rate hike in October and a 92% probability of another hike in December.

The US central bank raised its policy rate by 25 basis points this month. New York Fed President John Williams said that Fed policymakers probably only need to deliver one more hike this year to get inflation back on track to the central bank's 2% goal.

The rise in crude oil prices has added another layer of concern for the Indian market. The ongoing US-Iran conflict and the absence of a clear truce have kept oil prices elevated.

India imports nearly 90% of its crude oil requirement, making higher global oil prices a major concern for the country's import bill, inflation and current account.

The Indian basket of crude is currently priced at around $120.80 a barrel, nearly double the $67 a barrel recorded in February.

The depreciation of the rupee has compounded the pressure. The rupee is currently trading around 96 against the US dollar, making crude oil and other imports more expensive.

Brokerages see limited rebound
Brokerages expect October could bring some relief to the market, but they remain cautious about the sustainability of any recovery.

IIFL Capital said the market could see a "technical rebound" in October, but not necessarily a durable return to risk-on sentiment.

IIFL sees scope for the Nifty to rebound towards 23,300 if the index approaches the 22,500 level. However, it cautioned that a sustained break below 22,400 could trigger further losses.

Nuvama Alternative and Quantitative Research expects the Nifty to trade within a range of 22,350 support and 23,400 resistance, despite historically favourable seasonal trends in October.

Meanwhile, rollover data from Ambit Capital, IIFL Capital and Nuvama indicate that bearish positions have been carried into the October series.

Nifty rollovers stood at 74%, broadly in line with the three-month average. Bank Nifty rollovers were at 79%, marginally above the three-month average of 78%. Nifty futures open interest rose nearly 30% from the beginning of September. IIFL Capital said the increase suggested the presence of "heavy shorts".

Foreign investors' net short positions in index futures rose to around 267,000 contracts from 184,000 at the previous expiry, according to Nuvama data.

Domestic institutional buying has provided some cushion against the selling pressure, while retail investors have remained long on stock futures, creating a sharp divergence between foreign and domestic positioning, Nuvama said.

With global bond yields, crude prices and currency movements continuing to influence sentiment, market participants are likely to remain cautious as the October series begins.
(With Reuters inputs)