The Indian equity markets faced selling pressure on Tuesday, with the benchmarks Nifty 50 and Sensex trading in the red. 

Here are the key reasons behind the market selloff:

Rupee Weakness Accelerates Foreign Outflows

The selloff was underpinned by the rupee’s depreciation to 90.15 against the US dollar, a near-historic low. This weakness forces Foreign Institutional Investors to exit Indian equities to prevent the erosion of their dollar-denominated returns. FIIs have been net sellers, offloading approximately ₹1,47,369 crore from July to November.

Beyond the financial markets, the currency weakness is raising concerns about imported inflation. Since Indian companies pay for essential imports like crude oil and raw materials in US dollars, a stronger dollar makes these supplies significantly more expensive, threatening to squeeze corporate operating margins.

Conversely, the IT sector rallied as a defensive hedge. Since IT firms earn in dollars but incur costs in rupees, the currency depreciation instantly boosts their profit margins, attracting investor capital despite the broader market drop.

Fed Policy Decision Weighs on Sentiment

The pressure on the rupee is largely external, stemming from nervousness ahead of the US Federal Reserve’s policy decision on Wednesday. Global markets are currently weighing three potential outcomes. 

A rate cut would reduce the appeal of US bonds, likely weakening the dollar and slowing the removal of funds from emerging markets like India. Conversely, if the Fed keeps rates unchanged, the dollar is expected to maintain its strength. This would sustain pressure on the rupee and keep foreign investors in selling mode.

Surge in Japanese Bond Yields 

Adding to the volatility, Japanese government bond yields hit 1.96%—their highest level since 2007—signaling the potential end of decades of ultra-loose monetary policy. This surge poses a systemic threat to the “Yen carry trade,” a financial arbitrage strategy where global investors borrow yen at near-zero interest rates to invest in high-return emerging markets like India.

For years, this flow of money fueled rallies in emerging markets. However, with yields rising, the math behind the trade is breaking down. Not only are borrowing costs rising, but a strengthening yen also makes repaying loans significantly more expensive. This dynamic is effectively acting as a global “margin call.” To prevent massive currency losses, investors are rushing to the exit—selling Indian assets to convert cash back into yen—which is taking liquidity out of the domestic market and accelerating the crash.

India-US Trade Deal Uncertainty

Compounding the market’s unease is the lingering ambiguity surrounding the India-US trade agreement. Despite the arrival of US State Department official Allison Hooker in New Delhi to advance talks, clarity remains elusive. While External Affairs Minister S. Jaishankar emphasized that domestic interests remain paramount, the market views the ongoing negotiations as another source of short-term volatility rather than an immediate catalyst for growth.