Markets decline 1.5% on rise in inflation

Sensex ends 427 points lower at 28,503, with only a tenth of its components ending with marginal gains, while Nifty loses 128 points to 8,648

An unexpected rise in retail inflation in February led to a sharp correction in the stock market on Friday. The BSE Sensex and the National Stock Exchange's Nifty fell about 1.5 per cent each, led by declines in banking, metals and capital goods stocks. For the week, the indices lost about three per cent each, their steepest weekly fall this year.

Shares of banking sector majors State Bank of India and ICICI Bank fell about two per cent each on Friday, owing to a spike in bond yields, as Consumer Price Index (CPI)-based inflation rose to 5.37 per cent in February, against expectations of 5.2 per cent. The rise in inflation led to concern on interest rate cuts by the Reserve Bank of India (RBI).

The Sensex ended 427 points lower at 28,503.30, with only a tenth of its components ending with marginal gains, while the Nifty lost 128 points to close at 8,647.75.

The sharp correction this week was primarily due to global risk-off trade, triggered by fear the US Federal Reserve would advance an interest rate increase. The panic led to sell-off in emerging markets and risky assets, as well as a surge in the dollar. Fund tracking firm EPFR pegged outflows in Asia emerging market funds at $2.4 billion.

Foreign institutional investor (FII) outflows from the Indian market were muted. FIIs bought shares worth Rs 67 crore, while their domestic counterparts sold shares worth an equal amount, according to provisional exchange data.

Analysts say the market has come under pressure due to weak corporate earnings and lack of near-term triggers in the Union Budget. "Weak earnings growth in the previous quarter and a Budget that focused on longer-term structural issues meant there weren't any immediate triggers to take equity markets higher. Aggressive rate cuts from RBI could revive that sentiment," said Rajesh Iyer, head (investment advisory services), Kotak Wealth Management.

This week, the markets fell on all days except one - on Thursday, the benchmark indices had edged up, following the tabling of the insurance Bill and a positive economic growth forecast by the International Monetary Fund.

Analysts say most positive reports have been priced in, as Indian markets are trading at about 10 per cent above their long-term valuations. The Sensex is trading at 17 times its one-year forward earnings estimate.

Experts say the valuations are justified, as economic growth is set to pick up. "We believe a significant acceleration in economic and earnings growth is possible; this hasn't been factored into the current valuation of the market," said Sukumar Rajah, managing director and chief investment officer, Franklin Templeton Local Asset Management.