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Indian equities remained under pressure last week, with the Nifty extending its losing streak to seven consecutive weeks. Rising bond yields, elevated crude oil prices and heavy selling in insurance and financial stocks weighed on sentiment.
The Sensex and Nifty fell nearly 2% each on Thursday, wiping out a significant amount of investor wealth. The indices recovered some ground on Friday, but high crude prices and elevated bond yields limited the rebound.
With October 2 being a market holiday for Mahatma Gandhi Jayanti, the coming week will have only four trading sessions, from September 28 to October 1. Investors are likely to track five major factors.
1. US-Iran tensions
Developments in the US-Iran conflict will remain a major concern for investors. US President Donald Trump has rejected Iran's proposal for a seven-day ceasefire and the reopening of the Strait of Hormuz.
Iranian officials have also indicated that the country will maintain its position and continue to resist US and Israeli pressure. Any further escalation could affect oil supplies and increase volatility in global financial markets.
Investors will therefore closely monitor diplomatic developments and any signs of progress towards reopening the Strait of Hormuz.
2. Crude oil prices
Crude oil prices slipped around 2% on Friday but remained above $104 a barrel, keeping pressure on markets. Brent crude ended above $104, while WTI crude was above $92.
Oil prices have remained a key driver of market sentiment since the conflict in the Middle East intensified. Any disruption to supplies or the Strait of Hormuz could push prices higher, raising concerns about inflation and India's import bill.
JPMorgan has said it currently has no clear baseline for where oil prices could head as the conflict continues. The bank said the situation had become increasingly difficult to model because several assumptions it had made at the beginning of the conflict had since been overtaken by events.
3. Bond yields
Global bond yields and upcoming US economic data will also be closely watched. Investors will assess the data for clues about the Federal Reserve's interest-rate policy and its impact on emerging markets.
The US 10-year Treasury yield moved above 5.1% last week. Higher-than-expected economic data could keep yields and the dollar elevated, potentially putting pressure on the rupee, foreign fund flows and Indian equities.
On the other hand, softer data could ease concerns about interest rates and bring some relief to risk assets.
4. Foreign fund flows
Foreign portfolio investor (FPI) selling remains another key concern. After recording inflows in July and August, foreign investors have returned to selling through the exchanges.
According to Geojit Investments Chief Investment Strategist VK Vijayakumar, equity outflows through exchanges stood at Rs 25,682 crore during the month up to August 25. At the same time, FPI investment through the primary market reached Rs 8,551 crore.
This took total FPI selling through exchanges this year to Rs 2,95,971 crore, while investment through the primary market stood at Rs 54,398 crore.
Recent data also shows continued foreign selling in Indian equities, with FPIs withdrawing nearly Rs 21,000 crore from the equity market in September so far.
5. Rupee movement
The rupee remained volatile during the week, moving between 95.57 and 95.97 against the US dollar before ending largely flat near 95.85, according to Jateen Trivedi, VP Research Analyst, Commodity and Currency at LKP Securities.
He said fluctuations in crude and gold prices, along with a stronger dollar, limited gains in the Indian currency.
Trivedi expects the rupee to remain range-bound amid continued volatility in commodities and the dollar. He has placed the likely trading range at 95.50-96.50.
What lies ahead
High crude prices and elevated bond yields could continue to limit gains in the Indian market, according to Vinod Nair, Head of Research at Geojit Investments.
Investors will also keep an eye on inflation concerns, foreign fund outflows and weakness in emerging-market currencies. However, buying at lower levels could provide some support to the market.
Nair said the Nifty's ability to remain above the psychologically important 23,000 level reflects support from domestic liquidity. He added that while high oil prices and global yields could keep risk appetite under pressure, domestic growth and valuations could support selective buying.
Nifty technical outlook
The Nifty recovered some ground on Friday after its sharp fall in the previous session. However, Senior Technical Analyst at LKP Securities Rupak De said the index continues to form lower highs and lower lows and remains below key moving averages.
The weekly RSI has also turned bearish, indicating continued weakness in momentum.
On the downside, 23,000 is the immediate support level, followed by 22,700. On the upside, 23,200-23,300 is likely to act as the immediate resistance zone.
A sustained move above 23,300 could improve the technical picture, while a decisive fall below 23,000 could lead to further weakness.
