The Indian stock market witnessed a sharp decline on Friday, with the Nifty 50 index plummeting 1.03% to 22,519.4. This marks the steepest one-day percentage drop since March 19th, 2024, when the index fell by 1.08%.

The primary culprit behind the market selloff appears to be hotter-than-anticipated inflation data released in the US. Consumer Price Index (CPI) figures came in at 3.5%, exceeding the projected 3.4%. This unexpected inflation surge dashed hopes of an interest rate cut in the US this year, leading to widespread selling across markets.

Adding fuel to the fire, significant selling pressure emerged from Foreign Institutional Investors (FIIs) who remained net sellers for four out of the past five sessions, resulting in a net outflow of INR 6,526.71 crore. Further anxieties surrounding potential changes in the India-Mauritius tax treaty fueled a selling spree on Friday, with FIIs offloading a staggering INR 8,027 crore.

Gold’s relentless ascent also indicates a flight to safety, as investors seek refuge in this traditional haven during market volatility. However, a broader perspective of the Nifty 50 chart reveals a fundamentally positive trend. The index continues to hover near its all-time high, and a single day of decline doesn’t necessarily negate the ongoing upward trajectory.

The Nifty 50 appears poised to test its support zone at 22,300. This level presents a potential entry point for long positions if support holds. A breach below this zone could signify a shift towards a rangebound market rather than a sharp downturn, considering the underlying bullish sentiment and upcoming elections.

The India VIX index, a volatility gauge, surged 3.78% to 11.53 on Friday, indicating a rise in option premiums due to heightened volatility fears. In this environment, adopting hedged positions carries more favor compared to naked options trades.

Further, traders should be aware of a significant change taking effect on April 26th, 2024. The Nifty 50 lot size will be reduced from 26 to 25. Factor this adjustment into your trading positions to avoid any potential complications.

The yield on the benchmark 10-year government bond surged to a two-month high on Monday, reaching 7.15 percent, tracking the upward movement in US Treasury yields. This rise marked an increase from the previous Friday’s yield of 7.12 percent. Throughout April, the yield on the 10-year benchmark government bond has witnessed a hardening trend, rising by 10 basis points (bps).

Market experts attribute this increase in yields to the global trend of rising rates, particularly in the US. Naveen Singh, Vice President of ICICI Securities Primary Dealership, noted that India cannot remain an outlier amid the global trend of rising yields. He anticipates that the benchmark yield might stabilize around current levels, awaiting further cues from the Consumer Price Index (CPI) data.

Interestingly, a newly auctioned 10-year government bond, introduced for the first time on Friday, swiftly emerged as the second most traded bond, following the benchmark bond closely. Market participants foresee the possibility of this new bond ascending to benchmark status after its subsequent issuance. The government auctioned bonds worth Rs 20,000 crore, with a coupon rate set at 7.10 percent.

Vikas Goel, Managing Director and CEO of PNB Gilts, highlighted that the issuance size of the new 10-year bond suggests its potential to become the benchmark after the second issuance, especially amidst prevailing negative market sentiment.

Further bolstering bond yields on Monday was the rise in overnight interest swap (OIS) rates. The 5-year OIS rate surged by 10 bps, while the 1-year OIS rate increased by 5 bps.

The surge in US Treasury yields was fueled by speculation that the US Federal Reserve might delay rate cuts this year. Strong economic data from the US, including manufacturing and employment figures, reduced the likelihood of rate cuts in June, as indicated by the CME’s FedWatch Tool. Consequently, the yield on the 10-year US Treasury note rose to 4.45 percent by the end of Monday’s trading session.

With a keen eye on further developments, market participants await the US Consumer Price Index (CPI) data later in the week for insights into the future rate trajectory. Meanwhile, domestic inflation in India is expected to moderate, as projected by the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) in its recent forecasts for the current financial year.