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Dalal Street slumped by nearly 3 per cent as inflation surged to a three-year high of 7 per cent on Friday. With nervous investors unloading shares, fearing monetary tightening measures like a hike in cash reserve ratio (CRR), the 30-share BSE Sensex ended down 489.43 points or 3.09 per cent at 15,343.12. The broader based S&P CNX Nifty was down 124.6 points or 2.61per cent at 4,647.
Banking stocks fell after concerns of possible Reserve Bank of India (RBI) intervention to rein in inflation. Capital goods and power stocks also declined. Bharat Heavy Electricals (Bhel) and HDFC were major losers whereas Ranbaxy Laboratories and Tata Steel were top gainers from the Sensex pack.
Alex Mathew Head of Research, Geojit Financial Services, said, “rising inflation coupled with expectation of CRR hike by the RBI had a negative impact on the market.”
Prospects of further monetary tightening by the Reserve Bank of India following a surge in inflation is a cause for concern at a time when the already high rates are pinching the domestic industry. The surge in inflation has triggered fears that the RBI may raise cash reserve ratio (CRR). A CRR hike would suck out liquidity immediately pushing up the cost of funds and thereby curbing demand.
“The overall sentiment is down in the market and it knows that controling inflation will remain a challenge,” said Chetan Shah, senior portfolio manager at Religare Securities. The Sensex, which is down 24.4 per cent this year, fell 6.3 per cent on the week, its fourth fall in the past five weeks.
HSBC cut its targets for the Sensex to 17,500 at the end of 2008 and to 21,000 by the end of 2009, adding there were downside risks to earnings growth in Asia’s third-largest economy. “Although history may not repeat, looking at past trends, further downside cannot be ruled out. In the worst-case scenario, Sensex may bottom out at close to 10,000,” it said in a report on Friday.
“It is unfortunate to see the inflation at 7 per cent and is one of the important causes for dragging the stocks down,” said Deven Choksey, managing director at K R Choksey Securities. “We may take probably another two weeks to cool inflation, but things will come under control only after the global commodities markets come down.”
With the scare of a tightening in monetary policy financial shares were jolted, with HDFC falling 6.8 per cent. ICICI Bank Ltd fell 3.1 per cent and State Bank of India shed 2.1 per cent. In all, the banking sector index ended down 3 per cent.
“Maybe the government will be able to cool down the wholesale price index in the next few weeks … what matters is what kind of economic foundations we are building on which financial markets can thrive,” said Deepak Singh, an independent analyst from Bangalore.
