Sensex falls 318 points to 81,592, Nifty to 25,144 on rate-hike fears; rupee ends at 94.20

Shriram Finance, Tata Motors Passenger Vehicles and Grasim Industries were among the biggest laggards on the Nifty. Tata Motors PV fell 3.31% to Rs 287.40 before announcing a Rs 5,531 crore quarterly loss after market hours, and Grasim reported a quarterly loss of Rs 234 crore after a one-time cost.

Why rate-hike fears are back

The immediate trigger was inflation. India's retail inflation was 6.09% in October, above the RBI's upper tolerance limit of 6%, and the reading has led traders and economists to expect a prolonged period of tight policy, with some pointing to a rate increase at the December meeting of the monetary policy committee. The RBI has not said that it will raise rates, and the committee's decision is not due until its next meeting.

Analysts quoted in market reports said the phase calls for greater selectivity and not a broad defensive approach. They said that banking, capital goods and consumption stocks must show earnings resilience to attract fresh buying, and that the path of crude prices, the currency and foreign flows will decide whether the fall is a short consolidation or a deeper adjustment driven by earnings.

The falls imply the previous closes. Adding the day's losses back gives 81,911.01 for the Sensex and 25,299.35 for the Nifty on Thursday. The three sessions before Friday had taken the Sensex from 81,106 on 9 November to 81,879 on 11 November, after the holiday on 10 November, and to 81,911 on Thursday, a gain of about 805 points. Friday's fall therefore took back roughly 40% of that rise in one session, and the Nifty is now below its 11 November close of 25,255.

The rupee, the dollar and oil

The rupee's weakness has two sources. The first is the dollar: the dollar index touched 103.17 on Thursday, its highest level in nearly 19 months, after stronger-than-expected US inflation data, rising Treasury yields and hawkish comments from Federal Reserve officials. Currency dealers said markets price in an 85% probability of a Federal Reserve rate increase in December. The two-year US yield rose to 4.867% and the ten-year yield to 5.113%, and dealers warned that higher US yields and more attractive American assets could draw money out of emerging markets.

The second source is oil. Brent crude was near $95.47 a barrel in futures trading, down 0.37%, after settling at $95.82 on Thursday following Houthi claims of attacks on Saudi sites. India imports most of its crude, so a sustained rise in oil raises the demand for dollars. Jateen Trivedi of LKP Securities expects the rupee to trade in a range of 93.85 to 94.60 and said it will stay sensitive to dollar moves, fund flows and geopolitics.

There was some support. Foreign institutional investors bought Rs 12,563.33 crore of equities on Wednesday and more than Rs 7,800 crore on Thursday, according to market reports, and one expert called that a genuine cushion. Analysts also noted that a December rate rise in India could widen the interest-rate gap with the United States and in that way support the rupee, even though the inflation data that prompts it signals cost pressure.

On Monday the market will look first to crude and to the dollar, and to the next set of inflation and trade data. The trade figures for October, released on Friday, showed exports rising 29.9% to $89.99 billion and an overall deficit of $20.09 billion, which is a better picture than the rupee's fall suggests. Whether that helps depends on the dollar and on oil, which on this week's evidence are the two numbers that move the rupee most.