Indian bonds moved in a narrow range during early trading on Tuesday, while stocks fell, with rising oil prices and escalating tensions in the Middle East continuing to pressure markets, at a time when investors are focusing on the Reserve Bank of India’s moves to manage liquidity and support the rupee.
The yield on the benchmark 10-year Indian government bond, due in 2036, settled at 6.9611 percent by 10:00 am local time, compared to 6.9607 percent at the close of the previous session, according to Reuters.
The Reserve Bank of India announced the implementation of several reverse repurchase operations to withdraw liquidity from the banking system, after the surplus liquidity reached a record level over the weekend. On Tuesday, the bank is scheduled to conduct a reverse repurchase operation at a variable overnight rate worth 5 trillion rupees, or about 52.82 billion dollars, after withdrawing 2.59 trillion rupees through a similar operation for 30 days the previous day.
A trader at a state-run bank said that the central bank's continued absorption of liquidity indicates that it does not want the record cash surplus to lead to an easing of monetary tightening, adding that the immediate goal is to keep overnight interest rates stable, but rising oil prices make the task of confronting inflation more complicated.
These moves come at a time when the central bank is adopting a more cautious stance towards monetary policy, after last month indicating the possibility of an imminent increase in interest rates, in light of the continuing risks of inflation and the steadfastness of domestic growth. Large inflows into deposits of Indians residing abroad also contributed to the increase in excess liquidity.
Rupee and oil prices
The Indian rupee fell 0.2 percent to 94.68 rupees to the dollar, amid signs of central bank intervention to support the currency. Two bankers and a trader at an exchange brokerage firm said state-owned banks were seen offering the dollar at around 94.70 rupees, likely on behalf of the central bank, which has continued to intervene in the exchange market over the past two weeks.
Brent crude futures rose 0.6 percent to about $97.5 per barrel, with mounting fears of supply disruption as a result of renewed military escalation between the United States and Iran.
India relies on imports to meet about 85 percent of its crude oil needs, making rising energy costs a source of additional pressure on inflation and public finances.
Indian stocks
The Nifty 50 index fell by 0.46 percent to 23,668.85 points, while the Sensex index fell by 0.53 percent to 75,727.30 points by 10:06 a.m. local time, continuing to move near its lowest levels in six weeks that they recorded in the previous session.
Shares of 12 out of 16 major sectors declined, with shares of major financial companies declining 0.7 percent and private banks falling 0.6 percent. Shares of HDFC Bank, ICICI Bank, and Reliance Industries fell 0.7 percent, 1.1 percent, and 0.6 percent, respectively.
Shares of small and medium-sized companies also fell 0.3 percent each.
Hitch Taylor, technical research analyst at Choice Brokerage, said that the Nifty index may remain volatile near key support levels, while any recovery wave may face selling at higher levels.
Rising stocks and IPO activity
GE Vernova's shares for electricity transmission and distribution in India rose 8 percent, after the company won a contract to transmit high-voltage direct current electricity from Power Grid Company.
The shares of ShibRocket Logistics Company, which is backed by Temasek, also rose 3.2 percent after reducing its losses in the first quarter.
Siddhartha Khemka, head of wealth management research at Motilal Oswal Financial, said that the secondary market is still tepid, while the primary market is witnessing strong activity, with 12 initial public offerings being launched this week aiming to raise about 70 billion rupees, in one of the most active subscription periods during the current cycle.
Bharat Electronics and Hindustan Aeronautics shares also rose 2.3 percent and 3.7 percent, respectively, after the Indian Defense Acquisition Board approved various proposals estimated at about 1.1 trillion rupees.
In the overnight interest rate swaps market, the one-year rate held at 5.9750 percent, the two-year rate at 6.17 percent, while the five-year rate remained near 6.47 percent.
The US dollar fell on Tuesday, affected by the strong gains achieved by the Japanese yen, while investors awaited the release of US inflation data this week, which may determine the course of interest rates during the Federal Reserve’s upcoming meeting in mid-September.
The dollar index, which measures the performance of the US currency against a basket of major currencies, settled at 98.84 points, while the Japanese yen continued to rise, recording its highest level in seven months at 152.89 yen to the dollar during Asian trading, before trading later at 153.48 yen, according to Reuters.
Yen gains pressure the dollar
The gains of the Japanese currency were driven by increasing bets on the Bank of Japan raising interest rates, in addition to investors continuing to close selling positions on the yen, after it rose by about 4.5 percent since the dollar traded near the 160 yen level last week.
Analysts believe that a group of factors support the shift in the direction of the Japanese currency, including expectations of tightening monetary policy in Japan, the possibility of Japanese investors returning their money from abroad, as well as the dismantling of “carry trade” deals and American political pressure regarding the stability of exchange markets.
In this context, Japanese Finance Minister Satsuki Katayama confirmed that Tokyo and Washington continue close coordination on currency markets to ensure orderly movements in exchange rates.
US inflation data is at the center of investors' attention
While the euro settled at $1.1623 and the British pound at $1.3538, the markets' attention turned to the expected US inflation data, which includes the producer price index on Thursday and the consumer price index on Friday, which are the last major economic indicators before the Federal Reserve meeting on September 15 and 16.
Market pricing currently indicates a probability of approximately 60 percent to raise US interest rates this month, after the release of stronger than expected jobs data last week.
A member of the Federal Reserve Board of Governors, Christopher Waller, had confirmed that inflation developments would remain the decisive factor in determining monetary policy directions, indicating that he would support maintaining interest rates if price pressures continued to decline, but he would not rule out tightening monetary policy if inflation remained high.
In energy markets, oil prices maintained their trading near their highest levels in six weeks. Brent crude oil settled above $97 per barrel, while investors continued to monitor political developments and their potential impact on global inflation and energy markets.
The yuan benefits from the strength of Chinese exports
In other currency markets, the New Zealand dollar fell by 0.3 percent to $0.5860, while the Australian dollar stabilized near its highest levels in several months at $0.7215, supported by expectations of continued tightening of monetary policy in Australia.
As for the Chinese yuan, it maintained its trading near its highest level in three and a half years at 6.71 yuan to the dollar, benefiting from data that showed strong growth in Chinese exports during August, which strengthened confidence in the strength of external demand for Chinese goods.
Copper hit a new record high on Tuesday, with the market still focused on flows of the metal into the United States, at a time when supply in other markets is declining.
Three-month copper prices on the London Metal Exchange rose 0.6 percent to $14,597 per metric ton by 03:30 GMT, after earlier in the session recording a record level of $14,617. Copper had already reached a record level of $14,533 on Monday, according to Reuters.
The most traded copper contract on the Shanghai Futures Exchange rose 1.36 percent to 110,690 yuan ($16,495.29) per ton, after earlier rising 1.54 percent to 110,890 yuan, its highest level since January 30.
Copper continued to flow into the United States, as stocks of the metal rose on the COMEX exchange to a record level of 766,795 short tons, or the equivalent of 695,624 metric tons, as of last week.
An analyst at Chinese brokerage Ever Bright Futures said: “The large price difference between the COMEX and London metal exchanges indicates the continued flow of physical copper to the United States, which exacerbates the supply shortage in markets outside the United States.”
London Metal Exchange data showed that more than 51 percent of purchase orders for copper stocks in its registered warehouses were cancelled. At the same time, copper stocks monitored by the Shanghai Futures Exchange reached about 63 thousand tons last week, down 85 percent from the mid-March peak, recording their lowest level since January 2024.
The price of spot copper on the London Metal Exchange also continued to rise compared to the three-month contract, in a phenomenon known as “price decline,” which indicates limited supply of the metal in the near term.
In a related context, the US dollar stabilized near its lowest recent levels, making metals denominated in the US currency less expensive for holders of other currencies, although expectations about the possibility of the Federal Reserve raising interest rates in September still put pressure on high-risk assets.
Zinc also witnessed a noticeable rise, as its three-month price on the London Metal Exchange rose 1.02 percent to $4,024 per ton by 03:30 GMT, after touching $4,032, its highest level in more than four years.
The most traded zinc contract on the Shanghai Futures Exchange rose 2.37 percent to 27,635 yuan per ton, after recording 27,715 yuan, its highest level since January 30.
On the London Metal Exchange, aluminum rose 0.23 percent, while lead stabilized, nickel rose 0.12 percent, and tin fell 0.26 percent.
On the Shanghai Futures Exchange, aluminum rose 0.51 percent, zinc jumped 2.37 percent, lead fell 0.68 percent, nickel fell 0.55 percent, while tin rose 0.46 percent.
