Equities Range-Bound; Gilt Falls After High Yields At State Bond Auction

HIGHLIGHTS

• United Spirits rise 2% as report says parent Diageo explores stake sale in RCB
• IT shares rise up to 4% on optimism over US-China trade talks
• D-Mart shares crack 4% following ₹6.34 billion block deal
• UltraTech, Grasim up to 4% as Morgan Stanley remains bullish
• SEBI clears IPO papers of Kent RO, Karamtara Engg, 2 others

Indian equity markets were volatile on Tuesday with the Nifty 50 eking out a marginal gain, marking its fifth consecutive day of advances and maintaining levels above 25,100. Initial optimism faded as the session progressed, with benchmark indices unable to sustain early gains and closing largely flat.

Within the Nifty 50, Grasim Industries led the gainers, advancing after a positive rating upgrade. Other notable performers included Dr. Reddy’s Laboratories, Tech Mahindra, Tata Motors, and Infosys. 

Tata Motors' shares rose as investors responded positively to the company's strategic updates, particularly concerning profitability and market share targets in electric vehicles and commercial vehicles. Conversely, Trent, Asian Paints, Bajaj Finance, Tata Steel, and Bajaj Finserv were among the significant decliners.

Sectoral Performance
Sectorally, the realty index underperformed, declining by approximately 1%, while the IT index gained 1.7%, supported by strength in both large and mid-cap IT stocks. Media and power sectors also recorded modest gains. The Nifty Bank index slipped by 0.37%, weighed down by HDFC Bank, reflecting some profit-booking in the banking space.

Top Gainers	% Change	Top Losers	% Change
NIFTY IT	1.67%	NIFTY REALTY	-1.14%
NIFTY MEDIA	1.09%	NIFTY PSU BANK	-0.52%
NIFTY PHARMA	0.56%	NIFTY FINANCIAL SERVICES	-0.47%
NIFTY CONSUMER DURABLES	0.43%	NIFTY BANK	-0.37%
NIFTY HEALTHCARE INDEX	0.40%	NIFTY PRIVATE BANK	-0.17%

Indian government bonds ended lower for the third consecutive session on Tuesday, with weak demand for state debt at auction impacting overall market sentiment. This negated any earlier gains from value buying. The yield on the benchmark 10-year gilts settled at 6.2946%, its highest point since May 10, up from its previous close of 6.2837%. Similarly, the five-year 6.75% 2029 bond yield rose to 5.9513% from 5.8842% on Monday.

The Reserve Bank of India sold 14-year to 32-year state bonds at yields ranging from 7.05% to 7.15%. This marks the first time yields have surpassed 7% in the current financial year, adding pressure to government bond sales. Bond prices had already experienced declines on Friday and Monday. This followed market disappointment regarding the RBI's shift in monetary policy stance to "neutral," which suggested limited potential for further interest rate reductions after a previous 50-basis point cut.

The RBI also implemented a cut of 100 basis points to the cash reserve ratio for lenders, a measure expected to contribute to a liquidity surplus in the banking system. According to a Reuters poll of economists, the central bank is anticipated to maintain current interest rates for the remainder of the fiscal year.

Tenure	Today	Previous
10-year Gilt	6.29%	6.28%
5-year gilt	5.95%	5.88%
5-year OIS	5.73%	5.70%

The Indian Rupee ended Tuesday's trading session at ₹85.60 against the US dollar, marking a slight gain from Monday's close of ₹85.62. This stability emerged amid a confluence of global and domestic economic factors.

The dollar index saw a modest rise, reaching approximately 99, while most other Asian currencies exhibited limited movement. However, the offshore Chinese yuan dipped to 7.1873 on investor caution ahead of trade discussions between the US and China. Officials from both nations resumed negotiations in London, focusing on export controls for essential goods like rare earth minerals.

Despite some Asian currencies, including the Taiwan dollar and South Korean won, benefiting from recent dollar weakness, the Indian Rupee faces ongoing challenges due to the India's external investment deficit. This structural impediment continues to limit the Rupee's appreciation potential, even as other regional currencies advance.

Unit	Today	Previous
Dollar/Rupee	85.60	85.62
Dollar Index	99.09	98.87
1-year Dollar/rupee premium (%)	1.81%	1.79%

OUTLOOK
Indian equity markets are likely to extend their recent gains, supported by positive momentum in the IT sector, where both large and mid-cap stocks are expected to perform well. Sector rotation is likely to continue as investors reassess valuations and look for opportunities across different segments. 

On the fixed income front, Indian government bond yields are anticipated to remain elevated. The Reserve Bank of India’s neutral monetary policy stance is expected to keep borrowing costs under upward pressure. Recent sales of longer-tenor state bonds at yields above 7% signal that the market is adjusting to higher interest rate expectations, and this could influence both investor sentiment and capital flows in the coming weeks.

The Indian rupee is likely to remain relatively stable against the US dollar. Movements in the dollar index and developments in global trade, particularly those involving the US and China, will continue to impact the rupee’s performance. While renewed foreign portfolio investor inflows into Indian equities may offer some support, the rupee’s trajectory will largely depend on how effectively underlying economic imbalances are addressed

Key Events & Data Due Wednesday:

Economic Data

• US May CPI data
• US weekly crude oil inventories data

Corporate Actions

• Hindustan Zinc  to consider dividend
• City Union Bank to consider fund raising
• Atal Realtech to consider fund raising

Policy Events

• German Buba Vice President Buch speaks 
• ECB President Lagarde speaks
• ECB's Lane speaks