Inflation spooks markets

Bond prices crash; Rupee loses 17-18 paise; Sensex dips 70 points.

A jump in weekly inflation to 5.5 per cent drove benchmark bond yields to 10-month highs and dragged the Bombay Stock Exchange sensitive index (Sensex) 70 points lower on Friday as investors fretted that interest rates may start rising from current three-decade lows.

The rupee, hit by a drying up of dollar supplies, closed at its lowest level for more than five months, though its weakness boosted shares of software exporter firms.

Government bond prices crashed by over Re 1 at the long end of the yield curve, while yields on medium and short-term paper went down by 60 paise and 35 paise, respectively. The rupee lost 17-18 paise today to close at 45.68/69 to a dollar after opening at 45.50/52.

The spurt in inflation not only caused jitters in the market but also led to concern in the new government which wants prices to remain under check. "Over 5 per cent is not a happy situation, but we are not losing sleep over it. It (the rise) is mainly due to seasonal factors," Chief Economic Adviser Ashok Lahiri told reporters in New Delhi.

The yield on the 10-year benchmark 7.37 per cent 2014 closed at a 14-month high of 5.48 per cent after touching 5.50 per cent in the course of the day. On Thursday, it closed at 5.38 per cent. According to bond dealers, the yield on the 10-year paper had last touched this level in March 2003.

After the inflation rate was announced, mutual funds and primary dealers started dumping government paper. The rupee depreciation was spurred by heavy dollar buying by foreign banks on behalf of corporates along with the usual demand from the oil companies.

The equity market saw a volatile trading session as selling intensified across the board. Pharma stocks were among the biggest losers today with pharma major Ranbaxy Lab down 5.78 per cent to Rs 909.20 and Dr Reddy's Labs down 0.21 per cent to Rs 753.35. The selling wave in pharma scrips came after a leading broking firm downgraded the sector.

Heavyweight State Bank of India scrip continue to remain under selling pressure, down 2.59 per cent lower to Rs 437.45 at close, while Reliance Industries was down 2.09 per cent to Rs 444.80 and the Hindustan Lever scrip was down 1.40 per cent to Rs 126.80.

Even cigarette major ITC ended 2.69 per cent lower to Rs 867.40 amid fears that the finance minister may hike excise duty on cigarettes in the forthcoming Budget.

Leading BSE broker Ramesh Damani said the "market looks lack lustre as there are no positive triggers to the budget."

The BSE PSU index was the biggest loser among indices, down 1.63 per cent as MTNL lost 3.89 per cent to close at Rs 126.05, the ONGC scrip was down 2.70 per cent to Rs 644.40 and HPCL was down 1.72 per cent to Rs 327.60.

Among other index heavyweights, Tata Steel was down 2.94 per cent to Rs 280.30 and Hindalco was down 2.48 per cent to Rs 919.70 on concerns that higher fuel prices may bring down the margins of these companies.

Cement pivotals Gujarat Ambuja Cements (down 1.81 per cent to Rs 260.65), Grasim (down 1.60 per cent to Rs 915.35) and ACC (down 1.20 per cent to Rs 229.80) were hit by the reality of rising fuel costs. Both petrol and coal prices have been hiked recently, bringing in fears that margins of cement companies may be impacted.

Automobile pivotals Maruti Udyog (down 1.66 per cent to Rs 392.75) and Tata Motors (down 1.08 per cent to Rs 397.50) were the subject of selling following the recent hike in prices of petrol and diesel.