Indian benchmark indexes drop as US downgrade hits IT stocks; broader market up on rate cut hopes

India’s equity benchmark indexes inched lower on Monday, in tandem with global stocks, after Moody’s lowered its rating on the United States, although the broader mid-cap and small-cap stocks continued to rally on rising bets of a domestic rate cut.

The Nifty 50 fell 0.3% to end at 24,945.45 and the 30-member BSE Sensex closed 0.33% lower at 82,059.42. They swung between 0.2% gains and 0.4% losses during the session.

Global stocks dropped and U.S. Treasury yields rose as Moody’s downgrade of the U.S. government’s credit rating to “AA1” from “AAA” raised concerns about the country’s debt and rising deficits.

Domestically, IT companies, which get a major portion of their revenue from the U.S., dropped 1.3% and were the biggest drag on benchmarks.

However, the broader, more-domestically focused, small-caps and mid-caps added 0.5% and 0.1%, respectively.

They have risen for six straight sessions, with the mid-cap index almost erasing its year-to-date losses. The Nifty and Sensex are up 5.5% and 5%, respectively, so far this year.

The resilience in the broader market is likely due to sectoral churn as investors are buying infrastructure, real estate and other rate-sensitive stocks on the prospects of a rate cut, said Sunny Agrawal, head of fundamental equity research at SBICAPS Securities.

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Strong earnings from select companies in the broader markets have also aided sentiment, Agrawal said.

India’s retail inflation remained below the central bank’s 4% target for the third consecutive month in April, raising expectations of aggressive rate cuts to support economic growth.

The realty index jumped 2.3% on the day, to take its total gains to 7.7% in the four sessions since the inflation data was released.

Among individual stocks, Vodafone Idea slumped 8.8% after the Supreme Court rejected the telecom company’s plea to waive its dues to the government.

Divi’s Laboratories jumped 4.8% after the pharma company reported a bigger fourth-quarter profit.