India Markets Thursday Wrap-Up: Higher Inflation Pushes Indices Lower

by: Equitymaster

The Indian stock markets started of the day on a weak note opening at par and were treading cautiously for the first few hours. However as inflation numbers came in higher than expected, the markets reacted sharply and moved lower. Finally the markets closed near the daily lows. While the BSE-Sensex closed lower by around 202 points (down 1.2%), the NSE-Nifty closed lower by around 67 points (down 1.3%). The smaller indices also had a bad day on the bourses. BSE Mid Cap index and the BSE Small Cap closed 1.3% and 0.7% lower respectively. Most sectoral indices closed the day in the negative, with the exception of IT stocks. Banking stocks and realty were the worst hit in anticipation of a continued high interest rate regime.

As regards global markets, most Asian indices had a negative outing today. European indices also opened the day on a negative note. The rupee was trading at Rs 55.82 to the dollar at the time of writing.

The latest inflation numbers are out, and it was once again a disappointment. India's wholesale price index rose in May to 7.55%, keeping price pressures elevated. The reading was 7.23% in April, and the increase was on account of higher food and fuel prices. This leaves the Reserve Bank of India with the tough task of trying to balance growth, which has reached a nine year low and stubbornly high inflation. Plus the country has to be steered away from a cut in its rating outlook to junk status. However as core inflation is (excluding the volatile components of food and fuel) is still below 5%, there is still hope that the central bank may cut rates in its policy review next week. The repo rate of 8% is the highest policy rate among major Asian economies. The bank cut the rate by 0.5% in April as slowing growth outlook became a major concern and it is widely expected orchestrate further monetary easing. However there are still a number of issues at bay including supply bottlenecks and a less than normal monsoon to start off the season.