WORLD MARKETS: Breathing Space for the Rupee, Oversold Markets Eye a Relief Bounce

MUMBAI, 12 OCTOBER: Major U.S. stock benchmarks posted notable weekly gains after a strong, broad-based rebound at week’s end. The Dow Jones rose 0.8%, while both the S&P 500 and the Nasdaq Composite added 0.6% on Friday. The S&P 500 had its fourth straight weekly gain.  Nine of the eleven S&P 500 sectors closed higher, helping the major indexes recover from an artificial-intelligence stock slide earlier in the week.

The U.S. cash bond market will be closed today for the Columbus Day holiday. Prior to the pause, the benchmark 10-year Treasury yield settled slightly above 5.24%. This left interest rates resting just below a 24-year peak of 5.37% reached earlier in the week, driven by persistent inflation anxieties and the prospect of further Federal Reserve rate hikes.

Wall Street is preparing for a significant test of its current valuation metrics as the third-quarter earnings season approaches. Major commercial banks are scheduled to report their financial performance early in the week, with expectations for sustained earnings expansion remaining elevated. Investors will be monitoring these disclosures closely, especially after early reports from companies like Delta Air Lines missed estimates due to rising fuel costs.

Analysts expect Q3 S&P 500 earnings growth of about 29.6%, driven by the AI data-centre buildout.

A Consumer Price Index report scheduled for release on Wednesday will provide a major data point for the U.S. Federal Reserve ahead of its policy meeting late this month. The most recent CPI report released in September showed inflation at a 3.4% annual rate in August, unchanged from the previous month and still well above the Fed’s 2.0% target.

Brent slipped to about $103. President Trump’s announcement of a Russia-Ukraine energy ceasefire and a Russian diesel supply deal pressured prices, though neither side has confirmed the ceasefire. Reports that the U.S. will not strike Iran before the midterm elections also eased concerns. Support for higher crude oil prices came from Houthi strikes on Riyadh’s airport and further tanker attacks near the Strait of Hormuz.

The RBI established a direct dollar-supply window for major state-run oil companies and slammed the brakes on currency speculation by tightening derivative limits, banning cancel-and-rebook trades, and adding risk reserve requirements. These emergency steps immediately remove massive daily oil-import demand from the open spot market and squeeze out speculators.

The RBI also raised the minimum daily Cash Reserve Ratio (CRR) maintenance requirement for scheduled banks from 90% to 99% of the prescribed requirement.

Taken together, these measures should hearten rupee bulls at the open and relieve the acute pressure of depreciation, affording policymakers valuable breathing room. They do not, however, resolve the underlying structural strains of a widening trade deficit and persistent capital outflows

Markets have bounced back after an 8-week decline. A sustained move above last week’s high of 22,776 would strengthen the bullish case. On the downside, 22,300 is near-term support; a break below it could signal a resumption of the downtrend.

The rupee’s recovery in the wake of the RBI’s measures, a modest retreat in crude oil prices following President Trump’s announcement of an energy ceasefire, and deeply oversold technical indicators together suggest that the market is poised for a rebound.

Sustaining that bounce, however, will require a resolution of the underlying structural headwinds: an abatement of FII selling, an easing of geopolitical anxieties, and a meaningful decline in crude prices. For the near term, nonetheless, a relief rally appears overdue.

Report by: Mr. Devarsh Vakil, Head of Prime Research at HDFC Securities.

(Disclaimer: The information provided here is investment advice only. Investing in the markets is subject to risks and please consult your advisor before investing)

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