Rupee, shares punished; mkts look to RBI

India’s annual inflation rate is still in the double digits but data on Thursday showed it is at least declining, allowing authorities to focus on maintaining expansion and liquidity to weather the global turmoil instead of price stability.

And the oil minister offered the prospect soon of a possible cut in government-set fuel prices to ease the burden on consumers ahead of key state elections in the next two months.

“Relaxation in the monetary policy as was witnessed in the recent past are in line with the softening trend in inflation,” said Indranil Pan, chief economist at Kotak Mahindra Bank.

The wholesale price index, the country’s most widely watched inflation measure, rose 11.07 per cent in the 12 months to Oct. 11, below the previous week’s annual rise of 11.44 per cent.

Inflation peaked at 12.9 per cent in August and Economic Affairs Secretary Ashok Chawla said the government expected inflation at 9.5-10 per cent by the end of 2008.

US crude oil has fallen to about $67 a barrel from a record above $147 in July, putting pressure on India to cut the price of fuels still controlled by the government, after it raised them by about 10 per cent in June.

Some politicians urged the government for a cut to help the common man, just as it helped ailing airlines by giving them six months to pay jet fuel dues in instalments. Oil Minister Murli Deora said it was watching the price of crude and would decide in a week if administered prices should fall.

SHARES, RUPEE PUMMELLED

In the share market, the benchmark index dropped 4 per cent to its lowest since June 2006 as Asian stocks hit a four-year low for a second day on growing fears that a global downturn would depress corporate earnings further.

“Valuations are attractive, but still people are not committing enough funds,” said Neeraj Dewan, director at Quantum Securities.

“There are views that our growth will slow down in the short term, though medium term would be ok, but people are more concerned about the short term.”

Shares of banks, companies involved in metal and software exporters were hardest hit. The key index has fallen by more than half this year, with foreigners selling a net $12.2 billion, compared with 2007’s record net inflow of $17.4 billion.

The finance minister said the stock market regulator had asked foreign institutional investors not to lend Indian shares to offshore entities in a bid to ease selling pressure.

The partially convertible rupee , which suffers when foreigners pull funds from shares, fell to a record low of 49.85 per dollar before heavy central bank intervention pulled it back to 49.79/80, although it was still down 1 per cent on the day.

But government bond yields, which move inversely to prices, eased towards eight-month lows.

The benchmark 10-year yield dropped to 7.57 per cent as market expectations grew that the central bank would take more liquidity boosting measures on Friday to prod banks into lending to firms after Monday’s unexpected cut in the repo rate, the first in more than four years.

It has also boosted funds in the banking system by relaxing cash reserve requirements for banks and, late on Wednesday, raised the cap on overseas debt of domestic firms to $500 million from $100 million to encourage inflows to support the rupee.

A Reuters poll showed few expect another rate cut on Friday or another drop in the cash reserve ratio from 6.5 per cent just yet, although more measures were expected further down the line.

But Chawla at the finance ministry said there was a need to increase capital inflows and the government was monitoring liquidity, capital inflows and the rupee closely.