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Mumbai: The signs are not good for Indian shares this week as inflation threatens to breach three-year highs and authorities have cautioned they are prepared to sacrifice growth to fend off price pressures.
The government has already turned up the heat on steel producers and miners to curtail their prices, withdrawn cash incentives for exports of steel and cement, cut duties on edible oil imports and hinted at cutting levies on steel imports.
"Slowing growth and rising inflation are bad for stocks," said equity trader Kevin D'Souza. "It's a signal to sit on the sidelines and be watchful."
Data on Friday showed annual inflation leapt to 6.68 per cent in mid-March, the highest since a two-year high of 6.69 per cent hit in January last year. It has more than doubled from 3.11 per cent in late November, and analysts said the reading could top seven per cent in coming weeks.
Finance Minister P. Chid-ambaram said global demand for commodities such as food and crude oil was feeding into domestic inflation pressures, and the government would come down hard to rein in prices.
"I assure you that the government is determined to take all measures - fiscal, monetary and supply side - to moderate inflation and if that means we have to live with slightly less growth, so be it," he said in Mumbai on Friday.
Rupee rises
The data and the comments lifted the rupee more than one per cent to 39.85 per dollar, its strong-est since February as trad-ers expected the Reserve Bank of India (RBI) to let the currency appreciate to fight inflation. A stronger rupee would reduce the cost of imports, particularly oil and commodities that are priced in dollars.
Bond yields also spiked, climbing to their highest in four months, with investors bracing for monetary tightening such as a possible increase in the cash reserve ratio for banks.
Surprisingly, the stock market shrugged off the data after an initial drop and rebounded to finish last week up 9.3 per cent - the biggest weekly rise since late October and the first weekly gain in four weeks.
Analysts said the surge was underpinned by foreign buying after a big sell-off since mid-January, and probably some window dressing to pump up the net asset values of funds at the end of the quarter.
Foreign funds bought shares worth nearly $800 million in the five days to Thursday, data released by the regulator showed.
"It's difficult to sustain this rebound," said trader Rasesh Shah. "Risk aversion could only rise in the near term." The worries about a US recession and more writedowns caused by subprime losses could come back to haunt the markets, he said.
D'Souza said investors would be looking forward to the quarterly earnings for clues on the impact of slowing growth.
Software firms, which get more than half their revenue from the US, will be watched for their full-year forecast that is released with the results.
"The market has pulled back a little after a huge slide and is down about 20 per cent on the year," he said. "We are not out of the woods, there will be more bumps."
The Sensex, which ended at 16,371.29 last week, is well below its 200-day moving average of 17,239.9 while its 14-day relative strength indicator is at 58.9 - all pointing to resistance.
Dillemma
Strategist V. Venugopal said the government was caught in a dilemma caused by soaring prices that could cost the Congress-led ruling coalition dearly in national elections due by early 2009, and slowing growth which hurt incomes and jobs.
He said the data also indicated that prices had been rising faster than recorded earlier. On Friday, the government revised the annual inflation rate for the week ended January 19 to 4.45 per cent from 3.03 per cent reported at the time. It was a sharp revision that baffled analysts who track the data and possibly reflected a correction of errors made earlier.
The big question for the stock market is whether the RBI will raise interest rates to dampen inflation. The central bank has kept its main short-term lending rate at a six-year high of 7.75 per cent for a year, and is scheduled to review policy on April 29.
Rakesh Mohan, a deputy governor of the RBI, said the central bank would need time to study the price data to reach a conclusion, meaning it would watch inflation for a few more weeks before taking a decision.
Industry officials also seemed to be veering towards that view.
"There are four more weeks to go before the next policy appraisal by the central bank and we have to wait for the four weeks' figure," Deepak Parekh, chairman of Housing Development Finance Corp, told reporters.
"This is not a runaway inflation. It is higher than expected but manageable. It can come down," he said.
The writer is a journalist based in India.
It's difficult to sustain this rebound. Risk aversion could only rise in the near term."
Rasesh Shah, Trader at the Bombay Stock Exchange
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