Inflation Surges, Sensex Drops 3.5%

123jump.com Staff
20 Jun, 2008
New York City

Latest wholesales inflation index at the surged to a 13-year high to 11.11%. The sharp rise in inflation was fueled by the rising costs of fuel, food and materials. Higher inflation numbers has sparked fears of tighter monetary policy by the central bank, stocks fell sharply. Last week, the Reserve Bank of India made a surprise interest rate rise last week.

[R]10:00AM New York, 7:30PM Mumbai – Latest read on the inflation showed a surge to 13-year high. Stocks fell 3.5%.[/R]

Inflation surges into double digit

Indian shares fell on Friday after the latest inflation data for the third largest economy in Asia rose to a 13-year high early this month as elevated fuel prices fed into the data, driving bond yields higher and stocks down. The latest surge in inflation almost guarantees interest rate hike at the next meeting, the only question now is by how much. The central bank has targeted inflation in the range between 4% and 5% and the latest data is now running at twice that level.

The annual wholesale price inflation, India''s most widely watched inflation measure surged 11.05% to June 7. The inflation surged at the highest rate since May 1995 and above the forecast of 9.8% by most economists, according to official statistics released on Friday. The previous peak of inflation was at 11.11% in for the first week in May 1995.

Higher inflation numbers has sparked fears of tighter monetary policy by the central bank, stocks fell sharply. Last week, the Reserve Bank of India made a surprise interest rate rise last week, its first in more than a year, after a government decision to increase fuel prices.

India''s key lending rate, the repo rate, stands at 8%, its highest in 5 and half years, after a 25 basis point increase last week.

The main driver of inflation was elevated crude prices, metal and food prices on world markets and earlier this month the communist-backed ruling coalition, which has hesitated to raise fuel prices because of upcoming elections, bit the bullet and raised petrol and diesel prices by about 10%. International crude oil prices have jumped more than 45% since the last price increase in at the end of last year.

The rise was bigger than expected and with it India joined a growing number of Asian countries no longer able to afford big subsidies in the face of rising prices. China followed suit on Thursday with an 18% rise in fuel prices.

Market Sentiment

It was the worst day for Indian equity markets since the August 2007 as the key bench mark index fell more than 3%. After the trades, the 30-share BSE Sensex declined 3.4% or 516.70 at 14,571.29.

On the National Stock Exchange the CNX Nifty Index lost 3.5% to 157.70 at 4347.55.

Only 450 of the shares on the BSE traded shared gained, 2,247 shares declined while 43 were unchanged.

Of the Sensex index shares, 29 shares declined while only one stock gained.

Gainers and losers

Reliance Communication fell 6.7% at 491.30 rupees. South African mobile giant MTN remained silent on its talks with the company at its annual general meeting in Johannesburg on Thursday.

The AGM was expected to discuss Reliance Communications merger deal especially in the back drop of the Reliance Industries'' claims over first right of refusal for a controlling stake in Reliance Communications.

Hindalco Industries fell 6.3% at 161 rupees after its board approved raising up to 5,000 crore rupees through a rights issue to redeem a bridge loan it had taken for acquisition of Novelis Inc.

Jaiprakash Associates declined 6% at 166.60 rupees, Reliance Infrastructure fell 4.9% at 962.55 rupees and Bharti Airtel lost 4.8% at 766.40 rupees. Tata Steel fell 4.7% at 777.60 rupees.

ONGC was the lone gainer in the benchmark index with a rise of 1.6% at 866.85 rupees.

Reliance Industries with the largest weight in the Sensex index dropped 6.6% at 2,096.60 rupees.

Bank of India declined 7.4% at 247.90 rupees, State Bank of India was down 4.1% at 1,247.50 rupees and HDFC Bank fell 1.9% at 1,099 rupees.

ICICI Bank lost 2.5% at 734.65 rupees. ICICI Bank has a third largest weight of 8.1% in the Sensex.

Parsvnath Developers lost 6.3% to 152.10 rupees after the company reported 17% fall in net profit to 108.87 crore rupees in the fourth quarter ended march 2008 over the same quarter last year.

Auto stocks fell on worries that a tight monetary policy may compel banks to raise lending rates which in turn would hurt demand for automobiles.

TVS Motor Company dropped 5.2% at 32.85 rupees, Hero Honda Motors declined 4% at 759 rupees, Tata Motors traded lower at 2.8% at 488.85 rupees and Mahindra & Mahindra edged 0.2% lower at 575.20 rupees.