Mumbai: Worries in global markets dragged Indian equities on Monday as investors worldwide remained cautious after the US bond market flashed recession warnings. The BSE Sensex fell 0.93%, or 355.70 points, to 37,808.91 while the Nifty shed 0.90%, or 102.65 points, to end the day at 11,354.25 points.

The fall in Sensex and Nifty is a function of the weakness across global markets, led by the fall in US markets on Friday, said Shiv Diwan, co-head (institutional equities) at Edelweiss Securities Ltd. “Cautious commentary by the US Fed in contrast to their policy projections in December last year, has got people a bit concerned on the health of the world economy," he said.

Diwan, however, is optimistic that the India story will remain intact due to strong FII inflows. Foreign investment is seen robust throughout 2019 as business momentum is expected to start kicking in meaningfully in the second half of the year.

After aggressive selling at the beginning of the year, foreign institutional investors (FIIs) have made a comeback to India. They are net buyers of Indian equities worth $3.81 billion so far this year, while buying $5.89 billion in March. However, domestic institutional investors (DIIs) are net sellers to the tune of 13,500.1 crore in March and 11,919.1 crore in 2019 so far.

According to Vivek Ranjan Misra, head (fundamental research) at Karvy Stock Broking, a dovish US Federal Reserve and inversion of the US yield curve has fuelled fears of a global recession. “High valuations of stocks leave very little room for disappointment. However, we believe that while data is consistent with a slowdown, but a recession is unlikely in the near future, and equities should bounce back over the next two or three months," Misra said.

Meanwhile, concerns over strength of economic growth have lingered. US Fed chair Jerome Powell's indicating a status quo on interest rates throughout 2019 may have stoked a rally in India but raised fears of a US slowdown.

Those worries only worsened on Friday, when manufacturing indicators in Europe and the US flashed poor and the US bond yield curve inverted for the first time since 2007.

The yield on 10-year treasury bonds slipped 10 basis points to 2.44%, which was lower than the 2.46% yield on three-month treasury bills. Such an “inversion" is an indicator of a looming recession and the end of a bull market.

Bond yields thus are pushing lower from Japan to Germany.

Australia’s 10-year benchmark rate hit a record low on Monday.

Shares in China, Hong Kong and Japan lost 2%-3% on Monday.

According to HDFC Securities, an inverted bond yield curve can be a source of concern for a variety of reasons. Short-term bond yields are high perhaps due to an overly tight monetary policy. Investor concerns on future economic growth are stoking demand for safe, long-term bonds—pushing down their yield.

Bond prices move in the opposite direction of yields.

“In the year 2000, Indian markets were not so much interlinked with markets abroad due to limited presence of FIIs and hence no major impact of negative spread in 2000 was seen in Indian markets," said HDFC Securities in a note dated 23 March.

"In 2008-2009, Nifty made a top about 14-15 months after the spread went negative. We are now again witnessing negative spreads in the US after a gap of more than 11 years. We need to monitor whether these negative spreads continue for two more weeks and then wait for the correlation with the Nifty to play out with a lag."

The rupee, meanwhile has strengthened 2.6% so far in March, gaining over 1% in 2019.

Bloomberg contributed to the story.