Mumbai: News that inflation hit a 25-month high had a muted impact on the broader markets even as brokerages and bond dealers remained apprehensive of an impending monetary tightening by the Reserve Bank of India (RBI).
The Bombay Stock Exchange benchmark, Sensex, lost 113 points, or 0.77%, to close at 14538.9 even as money, government bond and currency markets were virtually unfazed.
Meanwhile, two government auctions sailed through raising Rs9,000 crore and no commercial bank knocked at the door of Reserve Bank of India seeking money from its repurchase window for the second successive day.
There was no immediate signal from the central bank on its policy stance. In Goa, RBI deputy governor Rakesh Mohan said the central bank had noted the inflation number “but the RBI stance is never based on a single week’s number.” He reiterated the bank’s monetary policy stance, outlined in its third quarter review last month, that “all possible actions are possible...including cash reserve ratio, liquidity adjustment facility, market stabilization bonds.”
“The RBI has a tightening bias but we do not expect any immediate action,” said A.Prasanna, a senior analyst with ICICI Securities, a primarly dealer that sells government bonds. “It has recently raised its short term rate and also hiked banks’ cash reserve ratio to suck out around Rs13,000 crore from the system. One needs to wait to see the impact of these actions.”
Another bond dealer at a foreign bank here suggested that the inflation level has probably peaked and it would likely go down from next week.
“Till September, the downward movement will continue because of the base effect but I am not very sure whether it can be contained between 5% and 5.5% which the central bank has projected,” said a dealer who did not wish to be named.
The broad based Nifty lost 36 points to close at 4,187. Pharma, metals, telecom, cement and capital goods stocks led the decliners. The National Stock Exchange’s CNX Nifty Junior, an index of small cap stocks, closed down 2.15% while the mid-cap index closed down 2.19%.
But this may only have been a knee jerk reaction, said Sriram Iyer, head of research, at Edelweiss Securities. According to him, after trading at historic highs, the market was expected to show some weakness.
Brokers and other analysts are not expecting an immediate rate hike by RBI as there is a widespread belief that the central bank may allow the rupee to appreciate as a strategy to contain inflation. The rupee traded at Rs44.136 to a dollar. The local currency could have got stronger had RBI not been in the foreign exchange market continuously buying dollar.
“One way of containing inflation could be allowing the rupee to appreciate without any intervention. This will stop the liquidity flow as, for every dollar the RBI buys from the market, it infuses an equivalent amount of rupee. Besides, a stronger rupee will also have a postive imacton commodity prices,” said another banker who didn’t want to be named.
RBI is expected to wait until after the Union budget is presented on 29 February before it announces any measure.
Even if it does raise rates, analysts said, it would not affect many companies because firms are less dependent on bank loans than before. “Indian companies (now) have many more avenues to raise money, including ADRs (American Depository Receipts), GDRs (Global Depository Receipts), internal accruals, equity dilution and tapping the international bond market,” said Shuchita Mehta, chief economist, at Standard Chartered Bank.
D. K. Joshi, senior economist at Crisil, a ratings agency, said with balance sheets of most companies looking robust, a rate hike may not impact significantly earnings growth.
“These (inflation) numbers do strengthen the possibility of a rate hike. But I don’t think we expect it to impact earningsnumbers,” added Ketan Karani, head of research, at Kotak Securities.
But Abheek Barua, chief economist at ABN Amro Bank,however, has a different view.
“The impact of rate hikes on earning s will not be insignificant. Borrrowing overseas is not a pancea for everything. Consumption related industries, including retail, construction, banks and real estate could be affected if the RBI continues to tighten its policy to fight inflation.”