Markets hit fresh five-week lows

The benchmark equity indices have extended losses and have hit fresh five-week lows in late afternoon session on heavy selling in rate sensitive stocks, as RBI hiked interest rates to tame towering inflation and projected a lower growth outlook. In its annual credit policy, the RBI has hiked the repo rate by 50 bps to 7.25 %. This will put significant pressure on the bottom-line of banks, and realty and auto companies. On the global front, US index futures were also trading in negative and most of the European markets were also trading in red. Most of the Asian markets settled in red. Back home, all sectoral indices were trading in the red, but rate sensitive's saw huge selling pressure. The broader markets also took a heavy beating from the bears; the BSE Mid cap and Small cap indices declined 1.58% and 1.68%, respectively. The market breadth on the BSE was in favour of declines in the ratio of 2047:682 while 100 scrips remained unchanged.

The BSE Sensex trimmed 387.90 points or 2.04% at 18610.12. The index has touched a high of 19,024.95 and a low of 18,599.70 respectively.

All the sectoral indices on the BSE were trading in the red. Auto down 3.50%, Bankex down 3.50%, Realty down 2.70%, Consumer Durables (CD) down 2.59% and Capital Goods (CG) down 1.99% were the major losers on the BSE sectoral space.

BHEL up 0.51%, Sterlite Industries up 0.42% and Infosys up 0.40%, were the only gainers of the Sensex.

On the flip side, JP Associates down 5.84%, M&M down 5.01%, Tata Motors down 4.28%, SBI down 4.04% and  Bajaj Auto down 3.67% were the major losers on the index.

The Reserve Bank of India (RBI) said on Tuesday that despite some moderation in growth in the current fiscal, India may still manage to clock around 8% expansion in the gross domestic product (GDP). However, at the same time, it expects the inflation to remain high throughout the current fiscal, which can have some further downside for growth.

The central bank noted that while growth was strong in FY11 at 8.6%, signs of moderation were actually there in the second half of FY11 itself, and the slowdown in capital goods production and investment spending is clearly visible. Further downside pressure may come from high oil and other commodity prices and the impact of the anti-inflationary monetary stance. Most business confidence surveys including the one from the central bank itself too indicated some moderation in business.

Despite this, growth may still remain reasonably good at around 8% but that would require a normal monsoon and some moderation in global commodity prices.  "Based on the assumption of a normal monsoon and crude oil prices averaging $110 a barrel over 2011-12, the baseline projection of real GDP growth for 2011-12 for policy purposes is placed at around 8%. The growth is projected to be in the range of 7.4% and 8.5%," said the RBI. However, most economists probably say that actual growth might work out to be closer to the bottom of the range given by RBI if crude remains close to $110 a barrel.

On the other hand the central bank expects the inflation to continue to remain high, at least in the first half of the financial year. The central bank noted a number of upside risks for inflation First, there is a significant suppressed component of inflation as the increase in crude oil prices has not been passed on completely. Once the government hikes retail fuel rates, inflation will certainly see a jump.

Further, 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. Finally, the significant increase in the prices of several important industrial raw materials, such as minerals, fibers, especially cotton, rubber, besides coal and crude oil etc will also tend to keep core inflation high.

Therefore, the central bank expects inflation to remain above its comfort zone. It has pegged the baseline projection for WPI inflation for March 2012 at 6% with an upward bias. The RBI expects that in first half, headline inflation will remain close to where it was in March, but in second half it will start coming down on account of policy tightening and moderation in aggregate demand, and may stand at 6% by end-March 2012

The S&P CNX Nifty lost 117.85 points or 2.07% at 5,583.45. The index has touched a high and a low of 5710.80 and 5580.80 respectively.

BHEL up 0.55%, Infosys up 0.53%, Sterlite Industries up 0.48% and Ambuja Cements up 0.20% were only gainers of the Nifty.

On the flip side, JP Associates down 6.05%, PNB down 5.15%, M&M down 5.10%, Axis Bank down 4.52% and SBI down 4.26% were the major losers on the index.

Rest of the other Asian markets barring Shanghai Composite added 0.71% settled in the red. Jakarta Composite declined 0.92%, KLSE Composite dipped 0.23%, Straits Times dropped 0.67%, Seoul Composite plunged 1.27% and Taiwan Weighted shed 0.69%. Stock markets in Japan remained closed today on account of Japan's annual Golden Week holiday.

Most of European markets were trading on negative note. CAC 40 fell 0.26%, DAX down 0.52% and FTSE 100 surged 0.25%.

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