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Indian stocks fell on Friday, snapping a five-day winning streak, as foreign investors sold shares amid the weakening of the rupee against the dollar, on concerns that the US Federal Reserve may lift interest rates aggressively to cool inflation.

Benchmark indices Nifty and the Sensex fell 1.10% and 1.08%, respectively.

Sentiments got dampened on concerns that the Fed may lift rates aggressively, said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services Ltd. Nifty on Friday witnessed profit-booking on account of concerns over interest rate hikes and weakening of the Indian rupee, he added.

The rising dollar index has been adding to the uneasiness, putting pressure on the rupee and prompting foreign portfolio investors (FPIs) to sell shares.

After being net sellers of more than 2.18 trillion worth of equities in the first six months of 2022, FPIs turned net buyers in July and August. However, they were net sellers of 1,706 crore worth of equities on Thursday after about 13 sessions of being net buyers.

FPIs turning net sellers has surprised bulls, said Vinod Nair, head of research at Geojit Financial Services. The broad-based selling witnessed among index heavyweights dragged the index down, Nair said, adding that “concerns about interest rate hikes hung over the markets".

Other Asian indices such as Nikkei Jakarta Composite, Shanghai Composite and Kospi, all corrected 0.04-0.6%. Only Hang Seng and Taiwan TAIEX managed to close slightly higher.

Some moderation in inflation seen in the US and India raised expectations of a likely moderation in rate hikes. Joseph Thomas, head of research at Emkay Wealth, said new data points and the still high level of inflation indicate rate hikes would be required more often to bring inflation down. The dollar index is probably set to move higher still. The market levels and the action reflected a response to these developments during the day. These factors regarding the potential for rates to move up may put some pressure on the markets."

Experts already have been cautious after a significant rise in the indices. With a strong rally, the market valuations were getting stretched, and some profit-booking was expected.

Analysts at Jefferies India Pvt. Ltd, in a 9 August note, said they are not convinced about the sustainability of the recent rally, though they noted the improved US outlook on lower inflation expectations and lower recession risks. The recent 15% rally in the Nifty has taken the bond yield gap to an uncomfortable level, they said.

With the rising dollar Index, the rupee is already under pressure. USD-INR spot closed 10 paise higher at 79.77. Strength in the dollar index and weakness in Chinese yuan are driving the rupee lower, said Anindya Banerjee, vice-president of currency derivatives and interest rate derivatives, Kotak Securities Ltd.

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