The Indian rupee extended its losing streak on Monday, declining for the fourth consecutive session to close at 90.28 (provisional) against the US dollar, weighed down by geopolitical uncertainties and profit-booking in domestic equity markets after benchmark indices touched fresh all-time highs.

Currency Performance and Market Dynamics

At the interbank foreign exchange market, the rupee opened at 90.21 and touched an intra-day low of 90.50 during the session before ending 8 paise weaker compared to the previous closing level. This marks the fourth consecutive day of decline for the Indian currency, which has lost 53 paise since December 30 when it closed at 89.75 per dollar.

The currency's weakness reflects sustained pressure from dollar demand and geopolitical tensions, with the dollar index trading 0.24% higher at 98.39, reflecting safe-haven demand.

Equity Markets Witness Sharp Reversal

Domestic equity markets surrendered early gains to close lower despite touching fresh all-time highs during the session. The Sensex declined 322.39 points or 0.38% to close at 85,439.62, while the Nifty slipped 78.25 points or 0.30% to settle at 26,250.30. The Nifty opened strong at 26,333.70 and scaled a fresh all-time high of 26,373 during early trade but failed to sustain elevated levels as selling pressure intensified.

Sectoral Performance and Stock Movements

IT stocks emerged as the biggest laggards amid concerns over potential US tariff actions. The IT index shed over 1.50%, becoming the worst-performing sectoral index. Infosys declined 2.03% to ₹1,607.10, HCL Technologies fell 1.85% to ₹1,609.80, and Wipro dropped 1.71% to ₹264.40. HDFC Bank also weighed on sentiment, declining 1.87% to ₹982.90.

On the positive side, defence and realty stocks outperformed. Bharat Electronics surged 3.03% to ₹415.35, emerging as the top gainer on the Nifty. The Nifty Realty index surged 2.10% on strong business updates from multiple realty companies.

Geopolitical Concerns and Market Outlook

Market sentiment remained guarded as geopolitical tensions escalated following US military action in Venezuela. President Donald Trump's renewed remarks on potential tariff hikes against Indian imports linked to India's continued purchases of Russian oil added caution to global markets. Despite the overall weakness, falling crude oil prices provided some cushion, with Brent crude trading 0.36% lower at $60.53 per barrel.

Foreign institutional investors turned net buyers, picking up equities worth ₹289.80 crore, while India's forex reserves jumped by $3.29 billion to $696.61 billion in the week to December 26. Market breadth tilted towards declines, with 2,545 stocks falling against 1,723 advancing on the BSE. Volatility picked up during the session, with India VIX rising 6.06% to 10.02, reflecting increased market uncertainty amid global developments.

Indian government bonds experienced significant selling pressure on Monday, with the benchmark 10-year yield climbing as traders factored in unprecedented state borrowing plans amid weakening demand and tight liquidity conditions. The benchmark yield settled at 6.6331%, up from Friday's close of 6.6062%.

Record State Borrowing Pressures Market

States are preparing to raise a record ₹5 trillion ($55.40 billion) through bond sales between January and March, representing their largest quarterly borrowing on record. The immediate test comes with Tuesday's auction of ₹301 billion worth of state bonds.

The unprecedented borrowing program has created uncertainty about market absorption capacity, particularly as demand from key investor segments shows signs of weakening.

Foreign Banks Turn Net Sellers

Foreign banks turned net sellers last week, offloading ₹110 billion worth of bonds in their biggest weekly sale in nearly seven months, according to CCIL data. However, mutual funds continued to see value and purchased debt worth ₹93 billion in the first two sessions of January.

Traders noted that the supply surge has hit a market where investors are reluctant to build positions as expectations for further rate cuts have faded.

Liquidity Constraints Persist

Liquidity conditions remain constrained, with the banking system's average daily surplus declining to ₹614.4 billion as of January 2, down from ₹726 billion in December and ₹1.78 trillion in November. The Reserve Bank of India continued its open market operations, purchasing bonds worth ₹500 billion during Monday's session at higher-than-expected cut-off yields.

"The 6.70% level on the 10-year yield should see some resistance as RBI continues its open market purchases to ensure that short dollar positions do not evaporate liquidity," said Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors.

Interest Rate Movements Across Curve

India's overnight index swap rates rose across the curve on Monday as rising supply pressure weighed on bonds. The moves reflect broader bearish sentiment in the rates market.

The combination of record supply levels, reduced foreign participation, and tight liquidity conditions continues to create a challenging environment for Indian government securities, with market participants closely watching Tuesday's state bond auction for demand indicators.