After one of the strongest monthly runs in recent memory, Indian stocks paused on Friday. The Sensex and Nifty opened lower and lost more ground in early trade. The drop was small, but it brings up a question that matters more than one session: can record foreign buying keep going while interest rates look set to rise?

The Sensex opened at 81,833.78, down 77.23 points or 0.09 per cent. It then slid about 450 points, or 0.55 per cent, to 81,457.74. The Nifty opened at 25,209.85, down 89.50 points or 0.35 per cent, and fell 182 points, or 0.71 per cent, to 25,117.

Most sectors were in the red. Nifty Realty fell the most, down over 1 per cent. Nifty Chemicals, Nifty Auto and Nifty Cement lost up to 1 per cent. Nifty Oil & Gas, Nifty Private Bank, Nifty Consumer Durables and Nifty PSU Bank were also lower. Healthcare was the exception. Nifty Pharma, Nifty Healthcare and Nifty 500 Healthcare rose up to 0.39 per cent, as investors moved into defensive stocks.

What Drove the Rally, and What Could Stop It

To read Friday's dip properly, you have to look at what came before it. The Nifty has gained 9.7 per cent so far in November. Market experts say the main reason is that foreign institutional investors (FIIs) have come back in a big way. Two other things helped: the AI trade lost some steam, and earnings growth in India is getting better.

The experts expect the foreign money to keep coming. "Indications are that the FII buying will continue taking the monthly inflows easily to above Rs 1 lakh crore, which will be a record high. With this kind of aggressive FII buying, the bears will be on the back foot," they said.

But inflation is rising in both the US and India, and that usually means higher interest rates, which tend to hurt stock markets. "In the US two rate hikes are likely in December and January. With the October CPI inflation in India rising to 6.09 per cent, the RBI will have to raise rates at least by 25 bp each in December and February. These concerns along with the ongoing DII profit booking can apply brakes on the rally, in the near term," the experts added.

A CPI reading of 6.09 per cent is above the 6 per cent upper limit of the RBI's tolerance band. That makes an early rate hike a real possibility rather than just talk. When rates go up, it costs more for companies to borrow and spend, and stocks look less attractive compared with fixed-income options. Rate-sensitive sectors such as realty, auto and banking were among the day's weakest, which fits that worry.

Oil added to the pressure. Brent crude rose to $95 a barrel on new geopolitical concerns around Saudi energy infrastructure and disruptions near the Strait of Hormuz. India imports most of its oil, so higher crude prices can push up inflation, weaken the rupee and widen the current account deficit.

Global markets gave no clear signal. In Asia, Japan's Nikkei was about 1 per cent higher, while Hong Kong's Hang Seng and South Korea's KOSPI were down up to 1 per cent. On Wall Street, the S&P 500 closed 0.35 per cent lower on Thursday and the Nasdaq fell 0.39 per cent.

For now, the market has two forces pulling in opposite directions. Strong foreign buying is holding prices up, while rising rates, costly oil and profit-booking by domestic institutional investors (DIIs) are pushing them down. Over the next few weeks, the key things to watch are whether FII inflows really cross Rs 1 lakh crore this month and what the RBI decides in December.

With inputs from IANS