Benchmarks tumble further as RBI forecasts inflation to remain high

The market continues to look under pressure and is going down further as investors seem to be booking their profit after Reserve Bank of India (RBI) made it clear in its monetary policy announcement statement that it expects the inflation to remain high, at least in the first half of the financial year. The central bank further added that even if the government hikes retail prices of fuels, it would not be able to pass on all the increase in crude oil prices and therefore fuel subsidy outgo is likely to increase significantly. This can boost fiscal deficit and hence will also boost inflationary tendencies. Meanwhile, global equity markets are also trading in the red with all the other Asian markets except Taiwan Weighted, which was flat and up by 0.01%, trading in negative territory. US index futures too are showing down tick in screen trade today. Back home, all the sectoral indices on the BSE except Oil & Gas, which was up by 0.60%, were trading in the red. Auto was leading the pack of losers as RBI's 50 bps rate hike announcement is likely to have negative impact on auto sales going forward. Information technology, metal and healthcare were the other major losers dragging the markets downwards. The broader indices too have plunged deep into the red with the BSE Mid cap and Small cap indices declining 0.82% and 0.72%, respectively. The market breadth on the BSE was in favour of declines in the ratio of 1585:840 while 88 scrips remained unchanged.

The BSE Sensex dropped 118.65 points or 0.64% at 18,416.04. The index has touched a high of 18,558.33 and a low of 18,339.53, respectively.

The BSE Mid cap and Small cap indices dipped 0.82% and 0.72%, respectively. 

All the sectoral indices on the BSE except Oil & Gas, which was up by 0.60%, were trading in the red. Auto down 1.93%, Information Technology (IT) down 1.70%, TECk down 1.63%, Metal down 1.48% and Healthcare (HC) down 1.13% were the major losers on the BSE sectoral space.

The top gainers on the Sensex were ONGC up 2.40%, HUL up 1.27%, HDFC Bank up 0.97%, SBI up 0.58% and RIL up 0.52%.

On the flip side, Bajaj Auto down 3.74%, Hero Honda down 2.98%, JP Associates down 2.47%, Reliance Infra down 2.29% and Jindal Steel down 2.25% were the major losers on the index.

The government on Tuesday strongly backed the Reserve Bank of India (RBI) after it hiked its policy rates by a more-than-expected 50 basis points (bps), in order to counter a very sticky inflation that has remained at elevated levels for close to two years now, even as it lowered the growth projection to 8% for FY12.

Both the Union Finance Ministry Pranab Mukherjee and the Planning Commission Deputy Chairman M S Ahluwalia said the move was in right direction and will help bring down the high inflation. However, the commerce and industry ministry, while supported the central bank's fight against inflation, added at the same time that RBI should ensure that interest rates hiked do not hurt credit availability to the India Inc.

Responding to the 50 bps hike, Mukherjee said it was a necessary step to contain inflation as Inflationary pressures in the economy were still very high. He added that the monetary policy tightening was also necessary to save the economy from volatile global commodity prices, which have shown substantial increase over last few months, and to ensure that there was no overheating that can impact medium term growth potential. On growth, he said it may be higher if there was a good monsoon and commodity prices come down.

The Planning Commission also welcomed the move with its Deputy Chairman M S Ahluwalia saying that hiking rates by 50 bps was a good decision as inflation was not just restricted to India but was becoming a global concern. "I am very glad that RBI has given a clear signal going beyond the usual 25 bps to something more substantial," said Ahluwalia. Though the Commission has not come up with its growth estimate yet for FY12, he accepted that slowing the economy down a bit will be sensible thing to do when inflation was running high and global commodity prices were rising to unsustainable levels.

The S&P CNX Nifty declined 42.45 points or 0.76% at 5522.80.  The index has touched a high and a low of 5567.70 and 5503, respectively.

The top gainers of the Nifty were ONGC up 2.94%, Ranbaxy up 1.31%, HUL up 1.19%, BPCL up 1.10% and HDFC Bank up 0.95%.

On the flip side, Dr Reddy's down 4.98%, Ambuja Cement down 4.68%, ACC down 4.52%, Grasim Inds down 3.64% and Bajaj Auto down 3.57% were the major losers on the index.

Other key Asian markets, except Taiwan Weighted, which was flat and up by 0.01%, were trading in the red. Shanghai Composite plunged 1.88%, Hang Seng shed 1.42%, Jakarta Composite declined 0.61%, KLSE Composite dipped 0.43%, Straits Times dropped 1.43% and Seoul Composite slipped 1.06% 

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