Sensex, Nifty slide despite ₹ relief: Why markets are falling; analyst views, targets

Bond yield rise further
To be sure, the 10-year bond yield for India stood at 7.38 per cent on Monday, up 8 basis points. This was the fourth day of rise in Indian bond yields and 69 basis points rise in total since July 7th's 6.69 per cent. With the 10-year US bond yields hardening at around 5.23 per cent, the narrowing differential between India and the US is weighing on local currency and foreign outflows.

At present, Nifty trades at 15.5 times estimated one-year forward earnings for FY28, well below 1 standard deviation, providing valuation comfort.

"However, macro headwinds dominate with Brent at $102 per barrel and a 204 bps India-US 10Y yield differential weighing on the CAD, rupee, and FPI flows, contributing to the 10 per cent correction since August," said Emkay Global.

This brokerage remained constructive on equities and set a September 2027 Nifty target of 27,000, implying 20 per cent upside, citing healthy domestic setup, cleaner corporate and financial sector balance sheets, well-managed government accounts, sustained economic growth, and reasonable corporate earnings.

Not all brokerages though agree.

Dollar sends EMs down

Dollar index, which has inverse relation with emerging market equities, stayed firm at 102 level, with South Korean Kospi leading the fall at Asian markets, dropping 3.65 per cent. Indian markets were no exception.

Rupee relief short term 

While rupee saw a strong rebound of around 1 per cent to 95.80 against the dollar in early trade, the market stayed jittery. The RBI stepped directly into the market as, from today, it will sell dollars to Indian Oil , HPCL and BPCL to cover their entire daily requirement until further notice, taking a major source of dollar demand out of the spot market.

The central bank has also tightened its rules on rupee derivatives, following last week's 25-basis-point repo rate hike to 5.50 per cent, the first increase in nearly four years. The pressure it is pushing back against is broad.

The catch is the cost: dollar sales to oil companies will draw down reserves, which already slipped by nearly $13 billion in the week to October 2.

"On the charts, the pair has support at 94.90 and 94.10, with resistance at 97. The next tests are India's September retail inflation print, expected to show a pickup to around 5.4 per cent, and US CPI on Wednesday. A hotter reading on either would revive the case for tighter policy and could push the pair back toward 97, while softer data and cooler crude would give the rupee room to test the 94.90 support," said Ashish Rajodiya, Head of Commodities, PL Capital.

Q2 earnings season

Analysts largely expect Nifty constituents to log a combined 25-27 per cent YoY growth in earnings in Q2. That said, markets continue to be skeptical regarding the earnings prospects of the larger stocks amid prevailing uncertainty around macro, policy and regulatory risks, Kotak Institutional Equities said.

Rising interest rates 
Anand Shah CIO – PMS & AIF at ICICI Prudential in a monthly note said companies with excessive leverage may face heightened balance sheet risks as funding costs rise.

Jefferies noted that RBI has already hiked repo rate by 25 bps and guided towards calibrated tightening rather than further cuts. Looking at the last four RBI hiking cycles on record - the sharp 2010-11 tightening from 3.25 per cent to 8.50 per cent, the 2013 taper tantrum spike, the brief 2018 hike, and the 2022-23 post-COVID tightening from 4 per cent to 6.50 per cent, growth as a factor usually suffers during hiking cycles, it said.

In such an environment, businesses with stronger near-term cash flows are likely to be better positioned than those with distant cash flows realizations, as higher discount rates can exert greater pressure on valuations, Shah said.

Technicals

ICICIdirect said with the 10 per cent correction seen over the past nine weeks, Nifty approached the April 26 low of 22,182. The percentage of Nifty 500 stocks trading above their 50-day EMAs has reached bearish extremes, indicating a stretched market poised for a sharp technical pullback when global macroeconomic conditions stabilize, the domestic brokerage said.

"Consequently, portfolios may benefit from a tilt towards value over growth, with a preference for businesses characterized by strong cash generation, prudent capital structures and durable balance sheets," it said.