In the first half of July financial markets were lacklustre,waiting for first quarter result announcements. Coupled with high inflation, as reported in July, the Wholesale Price Index rose at an annual rate of 9.44%, industrial growth remained slow.The growth in Index of Industrial Production for May 2011 came in at 5.6% as compared with 8.5% in July 2010 mainly on account of growth pressures in the manufacturing and mining sector. In its credit policy announcement on 26 July, RBI increased key policy rates by 50 basis points, surprising the market. Additionally,the central bank pointed out that roadblocks in government policy action could put further pressure on growth and ination.
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On the global front, matters seemed to have worsened with European sovereign ratings under pressure and the US government battling approval to increase its debt threshold to ward off a possible default. Growth in the largest emerging market, China,has been under pressure. This was reected in the fund flow data published by EPFR (Emerging Portfolio Fund Research), a global data provider. China equity funds tracked by EPFR continued to post outows through July despite the reported GDP growth for the first half of the year exceeding 9%. Given the backdrop of the delicate debt situation in developed markets and weak currency, EPFR reported strong ows to commodity sector funds with renewed interest in gold and precious metals. Crude prices, too, rose, fed by uncertain global economic environment; Brent crude prices registered another 4.1% rise in July. As of now, the US has averted a short-term crisis and bought itself some time to breathe with an agreement reached to increase its sovereign debt ceiling. However, the more fundamental issue of its large scal decit remains unresolved.
Graphics by Yogesh Kumar/Mint