Indian equities rally on softer US yields despite rising domestic bond rates
Indian stock indexes advanced as a retreat in the US dollar and cooling American bond yields provided relief to emerging markets, even as domestic government bond yields climbed on hawkish monetary policy signals.
Indian equity markets closed higher on Thursday, driven by a retreat in the US dollar and cooling American bond yields. The Sensex gained 0.82% to 77,537.72, while the Nifty rose 0.64% to 24,231.85. Midcap and smallcap stocks also advanced, with the Nifty Midcap 150 and Smallcap 250 gaining 0.3% and 0.6% respectively.
The rally followed a US Treasury move to double the buyback of 10- to 30-year paper, which pulled the 30-year yield off a 19-year high of 5.33%. Sunny Agrawal, head-fundamental research at SBI Securities, noted that measures to contain long-tenure bond yields led to a fall in the dollar index, which "augurs well for emerging markets and commodities."
Domestic Debt Pressure
Despite the equity optimism, India’s domestic debt market faced headwinds. The 10-year benchmark government bond yield jumped five basis points to close at 6.87%, up from 6.82%. Market participants interpreted the minutes of the latest monetary policy meeting as more hawkish than anticipated, with rate-setting members signaling readiness to raise rates if inflation risks materialize.
Alok Singh, head of treasury at CSB Bank, warned that the yield will likely trade between 6.80% and 6.90% for some time as markets absorb the shock. He added that further upticks could be expected if global geopolitical tensions worsen.
External Headwinds
Geopolitical friction continues to complicate the inflation outlook. Brent crude futures climbed 2.5% to $93.96 a barrel after US President Donald Trump threatened economic warfare against Iran and the UAE announced a suspension of trade with Tehran.
These external factors remain critical for Indian risk assets. Gaurav Garg, head-research at Lemonn, emphasized that fund flows are dictated by US yields and the dollar. He cautioned that the current market movement is a "relief rally on a foreign catalyst" until Federal Reserve chair Kevin Warsh speaks at Jackson Hole on the 28th.
Domestic institutional investors supported the market, buying shares worth Rs 3,537 crore, while foreign portfolio investors sold Rs 583 crore. Financial and consumer stocks led the gains, with Eternal rising 2.48%, Shriram Finance 2.1%, and Kotak Bank 1.82%. The India VIX declined 6.57%, signaling moderated near-term volatility.
The Indian rupee closed nearly unchanged at 95.70 against the dollar, which sat at a three-month low of 98.84. A public sector bank trader noted that central bank intervention was crucial in containing volatility amid persistent dollar demand from corporates and oil companies. The currency is expected to trade between 95.50 and 96 on Friday.
