Markets fall to week’s low on rate hike worries

Markets fall to week’s low on rate hike worries

India’s benchmark stock index fell for a third day on Thursday to its lowest level in a week after the International Monetary Fund (IMF) said the nation’s central bank may have to keep raising interest rates to combat inflation.

State Bank of India, the nation’s largest lender, declined 2.5% to its lowest level in almost five months.

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“Inflationary pressures remain pretty strong," IMF’s mission chief to the country, Masahiko Takeda, said on a video on IMF’s website on Wednesday.

Bajaj Auto Ltd, the second- biggest motorcycle maker, dropped for a fourth day, losing 3.4%.

“Balancing growth and inflation remains the biggest challenge for the government," said Sunil Pachisia, vice-president at Mumbai-based brokerage Pratibhuti Viniyog. Investors will keenly watch the government’s moves.

The Bombay Stock Exchange’s sensitive index, or Sensex, fell 116.36 points, or 0.6%, to 20,184.74 at close in Mumbai, the lowest level since 28 December.

Companies on the measure are valued at an average 19.1 times estimated earnings, compared with a recent peak of 20.1 times on 5 November.

The S&P CNX Nifty Index on the National Stock Exchange lost 0.5% to 6,048.25 points.

The BSE 200 Index retreated 0.8% to 2,494.58 points.

Most banks fell also amid concern that a shortage of cash may lower loan profitability. State Bank dropped 2.5% to 2,625.20, its lowest close since 11 August. ICICI Bank Ltd, the second-largest lender, declined 1.5% to 1,053.45, the lowest in almost four months.

Cash crunch

Liquidity continues to remain tight, said Kumaresh Ramakrishnan, a fund manager at DWS Investments, a unit of Deutsche Asset Management.

Indian banks borrowed an average 92,300 crore ($20.4 billion) a day from the Reserve Bank of India last quarter, the most since 2000, as they struggled to meet rising demand for loans. The overnight borrowing rate between banks was 6% on Wednesday, up from 5.5% at the end of last week.

Bajaj Auto, the best performer in the Sensex index last year, lost 3.4% to 1,327.85, the lowest since 17 August.

MarutiSuzuki India Ltd, the country’s biggest car maker, retreated 2.7% to 1,373.90, the most in more than two months. India will further withdraw fiscal stimulus as it strives to tame inflation in an economy set to return to 9% growth, Kaushik Basu, the chief economic adviser in the finance ministry, said on Wednesday.

The Reserve Bank has led stimulus withdrawal by raising rates six times in 2010 as growth recovered to 8.9% in the quarter ended 30 September, making India the world’s second-fastest-growing major economy.

Overseas funds bought a net 779 crore ($173.8 million) of Indian equities on 4 January, according to data on the website of the Securities and Exchange Board of India.