Sensex, Nifty flat; state-run banks fall

By Krishna V Kurup

(Reuters) - India's benchmark BSE index scaled a new peak on Friday before trading flat as retail inflation hit a five-month high in June and stayed above the central bank's target for the eighth straight month, raising chances of a rate hike.

India's annual retail inflation rose 5 percent in June, but was below market expectations, according to a Thomson Reuters poll. June was the eighth straight month in which inflation was higher than the Reserve Bank of India's medium-term target of 4 percent.

The broader NSE index was flat at 11,024.10 as of 0632 GMT, and was set to end the week 2.4 percent higher.

The BSE index inched up 0.14 percent to 36,600.77. It briefly hit a fresh high of 36,740.07 in early trade and was on track to end the week 2.7 percent higher. The index had hit a high of 36,699.53 on Thursday.

"The market is grappling with rising core inflation. While the recent drop in crude will help, the likelihood of a rate hike has clearly risen, and that is compressing spreads and margins for financials, particularly those with challenged balance sheets," said Sunil Sharma, Chief Investment Officer at Sanctum Wealth Management.

Public sector lenders took a hit, with the Nifty PSU bank index dropping as much as 2.5 percent. Bank of Baroda Ltd fell 3.8 percent while State Bank of India slipped 1.6 percent.

Shares of software services exporter HCL Technologies Ltd fell as much as 3 percent after it approved a buyback proposal on Thursday.

Meanwhile, an uptick in oil prices pushed energy stocks higher, such as Reliance Industries Ltd which gained 1.6 percent.

Infosys Ltd, which is due to report results later in the day, gained 1.8 percent.

Meanwhile, Asian markets took a breather from concerns around escalating U.S.-China trade war, with MSCI's broadest index of Asia-Pacific shares outside Japan up 0.56 percent.

(Reporting by Krishna V Kurup in Bengaluru; Editing by Vyas Mohan)