Sensex falls 493 pts on rate rise scare

Index has lost 4.2% in four sessions

The Bombay Stock Exchange (BSE) Sensex today suffered its biggest loss in seven months as investors dumped stocks on fears the Reserve Bank of India (RBI) may raise interest rates later this month to curb inflation, thus increasing borrowing costs and crimping demand.

The 30-share index, which opened at 20,163.85, fell to as low as 19,691.81 during the day. It closed at 19,691.81, down about 493 points, or 2.44 per cent. The index has lost 4.23 per cent in the last four sessions.

Among the major losers, Hindalco fell 7.02 per cent to '233.15 and Tata Motors lost 5.52 per cent to '1,189.50. Sterlite Industries, Mahindra & Mahindra and Bharti Airtel fell more than four per cent.

On the National Stock Exchange (NSE), the Nifty shed 2.38 per cent, or 143.65 points, and closed at 5,904.60. The index slipped below both the 50-day moving average (DMA) and the 100-DMA, which are considered strong support levels.(Click for TODAY’S MOVEMENT)

“The market outlook is hazy and not optimistic in the short term. This could go on for three-four months,” said Rashesh Shah, the chairman of Mumbai-based Edelweiss Capital. “High inflation & interest rates as well as input costs are impacting growth,” he added.

Food prices surged to a 23-week high of 18.32 per cent in the week ended December 25 from a year ago. To tame rising inflation, RBI is expected to increase interest rates by 25 basis points before the third quarter review of the monetary policy and another 25 basis points in the policy on January 25.

RBI had the flexibility of acting in between policy reviews, Governor Duvvuri Subbarao said in New Delhi today.

Foreign institutional investors (FIIs), which pumped in about $29.36 billion ('1,33,266 crore) in the Indian stock market in 2010, were major sellers today. According to provisional data on the BSE website, FIIs sold shares worth '1,040.74 crore. Domestic institutional investors were net-buyers to the tune of '1,115.83 crore.

“The current Sensex valuation of 16-17 times (price-to-earnings) is expensive,” said Akash Prakash, fund manager and chief executive officer of Amansa Capital. “FII flows will slow down in 2011 and the first half of this year will be tough,” he added.

The market breadth on BSE was extremely negative, with nearly four declining stocks for every advancing one. The combined turnover in the cash market on BSE and NSE was about '17, 862 crore. The turnover in the derivatives segment of NSE was '1,59,978.73 crore.

All BSE sectoral indices closed in the red. BSE Metal (down 4.03 per cent), BSE Auto (down 3.26 per cent) and BSE Consumer Durables (down 3.18 per cent) were the major losers.

“2011 will be a tricky and challenging year. But, it will be full of opportunities,” said Madhusudan Kela, the chief investment strategist at Reliance Capital. “But there is real trouble as inflation is going to be more steep and the base effect is to kick in by September-October. Commodity-driven markets are expected to do better than Indian stocks in 2011,” he said.

Earlier, the Asian markets ended on a mix note. Japan’s Nikkei 225 gained 0.11 per cent, China’s Shanghai Composite Index 0.52 per cent and South Korea’s Kospi 0.41 per cent, while Hong Kong’s Hang Seng fell 0.42 per cent and Taiwan’s Taiex shed 1.13 per cent.