Inflation spooks the markets

Thu, 8 Apr Closing

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Led by selling in metal, energy and banking stocks, the Indian markets closed deep in the red today. However, some amount of buying was seen in stocks from the realty and IT sectors. Over the course of the day, the indices steadily slipped deeper into the red on sustained selling activity. This was despite their opening close to the breakeven mark.

The BSE Sensex and NSE Nifty closed with losses of around 255 points (1.4%) and 82 points (1.5%) respectively. Stocks from the BSE Midcap and BSE Smallcap indices also witnessed selling pressure. These closed down by 0.4% and 0.3% respectively. On the broader BSE, one stock gained for every one that closed in the red. The rupee was trading at 44.63 to a US dollar at the time of writing. Among other key Asian markets, while China closed lower by 0.9%, Japanese index was off by 1.1%.

IT stocks were among the few exceptions today, as these closed strong. Key gainers included Infosys, TCS, and HCL Tech. These gains seem on the back of expectations of a good set of numbers from the IT companies for the quarter ended March 2010. Infosys, for instance will be announcing its results on April 13 (Tuesday). Today's gains came after the beating these stocks have seen over the past few days. This was owing to the appreciation of rupee against the US dollar and the fear that this would impact IT companies' margins in the coming quarters. Anyways, today's buying can purely be seen in anticipation of good numbers from these companies for the March quarter.

Metal stocks closed weak today. Key losers here included SAIL, JSW Steel, and Tata Steel. SAIL was in fact the worst performer among NSE-50 stocks. While there's no news that suggests such a fall in the stock today, the government today approved a 20% stake sale in the company as a way to raise divestment money. As per reports, the sale will happen in two tranches, with each tranche having a 5% government stake and a 5% fresh equity issuance. The first tranche is expected to fetch the government US$ 1.8 bn at the current market price. After the sale of both tranches is completed, the government's stake in the company would come down to 69%. The funds from fresh issue are expected to be utilised towards expansion of the company's steelmaking capacity.

India's food price inflation numbers were announced today. The same has increased to 17.7% for the week ended March 27. This is higher than the 16.4% rate recorded for the week ended March 20. This further strengthens the argument for the RBI to further raise interest rates in its April 20 monetary policy meeting. While that may be the immediate reaction of the RBI, over the longer term too policy making will be determined by how inflation shapes up. Hence if inflation refuses to come down from such high levels in the coming months, one can expect further monetary tightening.