Worried investors have started dumping stocks to survive the snowballing threat of a possible monetary tightening by the Reserve Bank of India (RBI) to rein in soaring inflation. With inflation hitting the 13-year high, the BSE Sensex slumped 517 points or 3.42 per cent at 14,571.29 on Friday, its lowest closing since late August 2007. And investors have now realised it’s only a matter of time before the RBI strikes more vigorously, leading to higher interest rates and a fall in corporate earnings and demand.With rising inflation and oil prices driving away bulls, the Sensex is now down 6,635 points or 31.28 per cent from a record high of 21,206.77 it hit on January 10, 2008. It is down 5,716 points or 28.17 per cent in calendar year 2008 so far. What’s adding to the worries is the increasing withdrawals by foreign funds. Foreign institutional investors have pulled out $ 1.85 billion in June alone, taking the total outflows to $5.66 billion in 2008. Outflows are expected to increase in the coming weeks.Market experts see a bumpy ride ahead. “As the inflation numbers are climbing up, participants are expecting further tightening monetary measures from the RBI including CRR hike, repo rate hike, and along with this, banks may hike the interest rate to cope with the RBI moves. This may affect the market adversely,” said Alex Mathew, head of research, Geojit Financial Services.Going forward, the market expects inflation to rise higher, though not at the same rate as the fuel adjustment was a one-time move. However, continued double-digit inflation is expected to have a huge psychological impact on consumers, further fuelling inflationary expectations. Due to the social implications, the market believes it will increasingly become a major political issue.Does it look like a classic bear market? “Volumes are not happening. overall, there is a sense of fear and uncertainty in the markets. Markets look weak, and in case they break 14,600-14,700, more damage could follow,” said an analyst with HDFC Securities.Analysts feel the RBI has been behind the curve for not having increased the repo rate in April and waiting till June for the first hike. This means there could be significant further tightening to arrest inflationary expectations, second-round effects and demand pressures. “We now expect the RBI to hike another 100 bps (one per cent) through a combination of raising the repo rate (50 bps compared with our earlier expectation of 25 bps) and the cash reserve ratio (50 bps) over the next three months, with risks towards more tightening,” said Tushar Poddar, vice-president, Goldman Sachs. The market is worried that RBI steps would lead to an increase in interest rates in the system. This will impact demand for a host of industries, prominent being auto, consumer durables and real estate. It will also lead to uncertainty in the valuation of banking and financial space.• RBI may hike CRR and repo rate by 0.50 per cent each to rein in inflation• Banks may hike interest rates to cope with RBI measures• Rupee may come under pressure, leading to more FII withdrawals• RBI steps could hit demand for auto, consumer durables, realty• There could be earnings downgrade in most industries
