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Led by realty and oil & gas stocks, Indian markets recorded a weak performance today. Stocks from the pharma and auto spaces however managed to buck the trend and closed in the positive. On the BSE, one stock gained for every stock that closed in the red.

The BSE Sensex and the NSE Nifty closed with losses of around 175 points (1%) and 60 points (1.2%) respectively. Stocks from the mid and small cap spaces also followed suit. The BSE Midcap and BSE Smallcap indices closed lower by around 0.7% and 0.4% respectively. The rupee was trading at 46.85 to the US dollar at the time of writing.

Other Asian markets also closed weak today. Big losses were seen in the benchmark indices of China (down 2%) and Hong Kong (down 1%). European markets have opened in the positive. Gold is currently trading up by around US $10 an ounce to yesterday's closing levels.

Banking stocks closed weak today. Leading losers included the likes of ICICI Bank, Axis Bank, IDBI Bank, and PNB. These were weighed down by expectations that the RBI might raise interest rates soon to tame rising inflation. This is the fifth straight weak day for banking stocks. Pressure on these stocks is simply because higher interest rates from the RBI would mean higher cost of funds for banks. This would subsequently force them to raise their own interest costs thereby leading to a possible decline in credit offtake.

Sure, the RBI is now expected to raise interest rates to curb the rising inflation. But will that have any impact? We ask this as the current rise in food prices is not really because of rising demand for the same. It is instead owing to supply shortages due to a weak monsoon this year. In fact, we had the weakest monsoons in 37 years and then flooding in some parts of the country. This disrupted agricultural production thereby leading to the current shortage of food grains. Therefore, we see any rate hike from the RBI having a minimal impact on food prices. But this will definitely be a worry for banks.

Realty stocks also felt the pinch of expectations of an interest rate hike. Stocks like DLF and Unitech led the losers' pack among the large caps. These companies are already facing the after-shocks of a recent increase by the RBI in provisioning requirement for advances to the commercial real estate sector from 0.4% to 1%. Now with an improving economic scenario and rising inflationary expectations, economists expect interest rates to rise from here on. This will have a negative impact on demand for new houses. Anyways, the demand has not really picked up to the pre-crisis levels largely owing to still high realty prices and caution on the part of the buyers.

Investors in Tata Motors (TTM) must be a happy lot these days. The stock, even after multiplying nearly five times over the past year, continues to lead the gainers list among the Sensex heavyweights. Recovery in volume growth in the Indian markets and surging export volumes have seemingly propped investor interest towards the stock. Not to mention the expectations of a fast improvement in its balance sheet that was roiled after last year's acquisition of the troubled Jaguar-Land Rover (JLR) brands. Other auto stocks that gained today were Hero Honda and Eicher Motors.

Source: Indian Markets Friday Wrap-Up: Realty Bites the Markets