Inflationary concerns pull down markets

High inflation forecast by the Reserve Bank of India (RBI) saw the benchmark indices losing ground today on concerns of further monetary tightening.

The central bank increased the repo and reverse repo rates by 25 basis points each today, while raising the March-end inflation estimate to seven per cent from the earlier 5.5 per cent.

The Bombay Stock Exchange (BSE) benchmark Sensex lost 181.83 points, or 0.95 per cent, to end the day at 18,969.45. This was quite close to the day’s low of 18,949. Interest rate-sensitive sectors, including banks, auto and realty, led the selloff.

On BSE, 1,652 stocks lost ground, as against 1,207 gainers. Meanwhile, the broader Nifty of the National Stock Exchange (NSE) settled the day at 5,687.40, down 55.85 points, or 0.97 per cent.

Market participants, while attributing today’s fall to RBI concerns on high inflation and the increased probability of monetary tightening, said Thursday would be an important trading session due to the derivatives expiry.

While the markets will remain close tomorrow on account of Republic Day, analysts expect rate rise concerns to weigh on bourses for the rest of the week.

“Although the rate rise by RBI was in line with expectations and there were no nasty surprises, the markets slumped on fears that if inflation didn’t soften in the coming weeks, there may be further monetary tightening, which could then have a sobering effect on economic growth,” said Amar Ambani, head, research (India Private Clients), India Infoline.

Banking stocks were in the limelight today, with the BSE Bankex ending the day as the worst performer, shedding nearly 300 points, or 2.34 per cent. ICICI Bank led the pack, falling 4.21 per cent (Rs 45.60) to Rs 1,038.30.

Other private sector banks including HDFC Bank, YES Bank, Kotak Mahindra Bank and IndusInd Bank lost over two per cent each. There are concerns that private banks may have to offer higher deposit rates in the fourth quarter to sustain the current level of credit growth. This, in turn, will impact margins. FMCG (fast moving consumer goods) stocks also witnessed selling pressure after the sector heavyweight, Hindustan Unilver, reported a fall in quarterly earnings. The stock fell more than five per cent after the company announced a 1.79 per cent decline in net profit at Rs 637.51 crore on account of high input costs.

Meanwhile, provisional data showed foreign institutional investors net bought Indian shares worth Rs 273 crore, even as domestic institutions were net sellers of shares worth Rs 170 crore.