Indian equities enter October after the Nifty 50 and Sensex recorded their eighth consecutive weekly decline, marking the longest losing streak for both indices in 25 years. The Nifty 50 fell 8.7% over the eight weeks, while the Sensex declined 8.4%. The latest weekly fall came amid continued foreign selling, elevated crude oil prices, and a rise in global bond yields.
With several of these pressures still in play, market participants are watching a few key factors that could influence the direction of Indian equities in October.
Foreign selling remains a key factor
Foreign portfolio investors have been a significant source of selling pressure on Indian equities.
According to Reuters, foreign investor outflows from Indian shares had reached $27.8 billion for the year by October 1. Higher returns available in US fixed-income markets have also increased the relative appeal of bonds for global investors.
The US 10-year Treasury yield touched 5.34% on October 1, its highest level since 2002. Higher US yields can affect emerging-market assets by making dollar-denominated fixed-income investments relatively more attractive. The dollar's strength has also added pressure to the rupee.
A moderation in US bond yields could therefore change one of the external pressures facing Indian equities. However, the direction of yields will continue to depend on inflation, economic data, and expectations around US monetary policy.
Crude oil remains another important variable
Oil prices are particularly relevant for India because the country imports a large share of its crude requirements. Brent crude crossed $100 a barrel on October 1 amid geopolitical concerns and remained above that level on Friday. Higher crude prices can increase India's import bill, put pressure on the rupee, and add to inflationary pressures.
Oil prices have also been linked to the recent weakness in Indian equities. Reuters reported that Brent had risen sharply in September as geopolitical tensions raised concerns about global supply.
A sustained moderation in crude prices would reduce some of these pressures, while any further increase could keep inflation, currency, and corporate-margin concerns in focus.
RBI policy will be closely watched
The Reserve Bank of India's monetary policy decision is another key event for markets in October. The Monetary Policy Committee is scheduled to meet from October 5 to 7, according to the information cited in the Reuters report. A Reuters poll indicated expectations of a 25-basis-point increase in the repo rate to 5.50%.
The policy decision comes against a backdrop of higher inflation, a weaker rupee, elevated crude prices, and rising bond yields. Beyond the rate decision itself, markets will also track the RBI's assessment of inflation, economic growth, and the outlook for monetary policy.
Domestic demand remains an important part of the picture
The pressure on equities from foreign flows has been accompanied by relatively firm domestic economic activity. Reuters reported that India's economy grew by nearly 8% in the April-June quarter, while bank credit growth had risen above 19% in July.
The upcoming festive season will provide another indicator of consumer demand. Stronger consumption could have implications for corporate earnings expectations, while weaker spending could add to concerns around earnings growth. Domestic institutional flows will also remain relevant as foreign investors continue to sell.
What could influence markets in October?
There is no single factor determining the direction of Indian equities. Several developments will be watched together. These include the movement in crude oil prices, the direction of US Treasury yields, foreign portfolio flows, the rupee, and the RBI's policy stance.
The market also enters October after a sharp September decline. The Nifty 50 fell 6.1% during September, while the Sensex declined 5.8%. Foreign investors sold $2.7 billion of Indian equities during the month, taking their total outflows for the year to $26.8 billion as of September 30.
*Source: Firstpost, Reuters *
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