Indian markets set for weak open as FII selling, bond yields weigh despite softer inflation

The Indian stock market was bracing for a weak start on Thursday morning, caught between competing currents that left investors uncertain which way the day would break. GIFT Nifty, the futures contract that signals how the market will open, was down 67.5 points—a 0.30 percent decline—as of 8 a.m., reflecting the weight of three headwinds: foreign investors pulling money out of Indian equities for a fifth straight day, US Treasury yields sitting stubbornly high, and a muted performance across Asian markets. Yet there were counterbalances too. US inflation had come in softer than expected, which meant traders were now pricing in a much lower chance of another Federal Reserve rate hike in October. Oil prices had dipped below $100 a barrel. The question facing Indian markets was whether these modest pieces of good news could offset the larger forces working against them.

The selling pressure from foreign investors had become the dominant story. On September 30 alone, FIIs offloaded more than Rs 10,000 crore of Indian equities—the second consecutive day of such heavy selling. This extended a streak that had now lasted five sessions, driven largely by the sharp climb in US Treasury yields, which had tightened financial conditions globally and made investors more cautious about emerging markets. Domestic institutional investors had stepped in to buy, purchasing Rs 11,271 crore worth of shares, but their support had not been enough to prevent Indian equities from sliding. On Wednesday, the Sensex had fallen 48.78 points, or 0.07 percent, to close at 72,480.29, while the Nifty dropped 95.75 points, or 0.42 percent, to 22,620.45. This marked the third consecutive session of losses, a pattern that suggested momentum had shifted against the bulls.

The broader Asian backdrop offered little encouragement. Across the region, markets were subdued as investors digested what had been a difficult September for global bonds. The MSCI index tracking Asia-Pacific shares outside Japan declined 0.2 percent, while South Korea's Kospi slipped 0.14 percent. Japan was the lone bright spot, with the Nikkei gaining more than 1 percent as semiconductor stocks advanced. In the US, equity futures were edging higher—S&P 500 and Nasdaq futures both up around 0.3 percent—but this modest strength had not yet translated into conviction among traders.

The inflation news from the United States had genuinely shifted expectations about monetary policy. A softer-than-expected reading on US inflation prompted a sharp recalibration of rate-hike bets. Just a week earlier, traders had priced in a 71 percent probability of another Federal Reserve rate hike in October. That figure had now collapsed to 38 percent. New York Fed President John Williams had added to the dovish tone by stating there was "no urgency" for further action, coming after the Fed had already raised rates in September for the first time in three years. On Wall Street itself, Wednesday's close had been mixed: the Dow Jones fell 443.87 points, or 0.86 percent, to 50,906.05, and the S&P 500 declined 0.25 percent to 7,651.54, though the Nasdaq Composite managed a small gain of 0.24 percent to 26,861.06. Both the S&P 500 and Nasdaq had nonetheless recorded their second consecutive quarterly gains, suggesting some underlying resilience.

Energy markets had also provided a modest reprieve. Brent crude had edged below $100 a barrel, trading at $98.15, up just 0.1 percent in early Asian trading, while West Texas Intermediate sat at $90.35, down 0.1 percent. Both benchmarks had gained about $1 a barrel on Wednesday. For Indian markets, this mattered because crude prices had surged through September, adding to inflation pressures and weighing on sentiment. The slip below $100 offered some relief on that front. Yet Ponmudi R, CEO of Enrich Money, cautioned that this relief could prove fragile. Developments in US-Iran peace negotiations and the outlook for Middle East exports remained fluid, he noted, and any setback in diplomatic efforts or renewed disruption to energy flows could quickly restore the geopolitical risk premium in crude prices.

The fundamental tension facing Indian equities was clear: the external backdrop remained mixed, leaving the market sensitive to developments in both global interest rates and energy markets. The sharp rise in the US 10-year Treasury yield in recent weeks had tightened global financial conditions and weighed on broader risk appetite. Foreign investors, facing higher returns available in US dollar-denominated assets, had little incentive to hold emerging market equities. Domestic institutions were providing a counterweight, but their buying power had limits. As the market prepared to open on Thursday, the outcome would likely depend on whether the softer inflation narrative and lower oil prices could gain traction, or whether the weight of foreign selling and elevated global yields would continue to dominate.