Mumbai, Aug. 6: Markets have started paying the price — for a late monsoon and the country’s thirst for oil.
Stocks went into a tailspin and yields on government bonds (gilt) soared as reports about a spurt in the inflation rate to 7.51 per cent fanned fears that a an increase in interest rates was only a matter of time now.
The BSE sensex slid 55.79 points to 5196.99 and the return on gilts peaked at 6.32 per cent as investors, unnerved by price pressures, scampered out of stocks and dumped government bonds in anticipation of a rate hike.
Gilts yields — which move in a direction opposite to prices — on the benchmark 10-year security hit an intra-day high of 6.32 per cent, a gain of nearly 21 basis points, before moderate buying drove it down to 6.28 per cent.
“The inflation numbers caught all of us by surprise. There were recent comments it had tapered off, and the markets expected a figure between 6.70 and 6.75 per cent,” Tarini Vaidya, treasury head at Centurion Bank, said.
Attention next week will be riveted to two events —Monday’s Employees Provident Fund meeting on returns and Tuesday’s Federal Open Market Committee huddle, where a decision on US interest rates will be taken.
“With inflation at over 7.5 per cent, chances of a cut in the EPF rate are too slim. As far as the Federal Reserve is concerned, it has already made its preference for a gradual, 25-basis point rise known,” Vaidya added.
On bourses, operators and retail investors jabbed the sell-button after the inflation bombshell was lobbed. The sensex opened at 5249.73, rallied to a high of 5262.89 and slid to a low of 5166.19 before ending at 5196.99, a decline of 1.06 per cent from Thursday’s finish of 5252.78.
“People are realising that inflation is here to stay. The figures that have been announced are for the week ended July 24. We are already on to 8 per cent if the July 31 hike in oil prices is factored in,” Arun Kejriwal of KRIS said.
A rise in interest rates — which sucks money out of stocks and other risk-laced assets — now appears imminent. “The soft-rate regime is gone. We are in for inflation and rising prices. This will hit equities,” he added.
The inflation jitters spilled to the forex market, where a wobbly rupee tested a low of 46.48 against the dollar, before Reserve Bank’s intervention helped it close at 46.37, little changed from 46.38 on Thursday. Banks had resorted to dollar short-covering early in the day, when the rupee opened weak at 46.42 to a greenback.