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Mumbai: Indian shares face a downhill ride this week after inflation shot up to its highest in 13 years, triggering concern the central bank will hike interest rates again and tighten money supply - moves that could squeeze consumer spending and hurt sales across industries.
"This is indeed a very difficult time and we will have to take stronger measures both on the demand side and monetary side," Finance Minister P. Chidambaram said, on the rising inflation rate.
Sherman Chan, an economist at Moody's Economy.com, a unit of Moody's, said the Reserve Bank of India (RBI) would not wait for its scheduled policy review on July 29, but will act much faster to tame inflation.
"Amid uncomfortably strong inflation, which is now twice as high as the central bank's target rate, the RBI looks set to further tighten monetary policy," the Sydney-based analyst said in a note.
The RBI had raised its key lending rate in a surprise move on June 11 and has raised cash reserve requirements by 75 basis points in 2008.
"By unexpectedly raising the lending rate last week for the first time in over a year, the RBI has sent a clear signal to the market that the tightening cycle has not finished and that they will take an aggressive approach if necessary," Chan said on Friday.
Political factors will also weigh on the market this week when the Congress-led coalition faces a litmus test on a civilian nuclear deal with the US. Communist allies, whose 62 parliamentary seats are crucial for the government to remain in office, have warned they would withdraw support if the government proceeded with the deal.
With inflation expected to remain in double-digits in the coming months, it would be suicidal for the ruling coalition to precipitate a political crisis and go for early elections, which are due by May next year.
"We're staring down a barrel," said equity trader Mukul Patel. "The bears have tasted blood and they will be all over the market."
The 30-share Sensex index fell 4.1 per cent last week to its lowest close in 10 months at 14,571.29. It has dropped for five weeks in a row, losing 17.6 per cent and is down 28.3 per cent in 2008.
"Strong inflation, coupled with tight monetary policy settings, will weigh on investor sentiment, which has already been reflected in the decline of stock prices," Chan said.
"Household consumption and business investment will both moderate this year, but continued government spending on infrastructure development will help to support growth," she added.
Looming slide
Chartist Kanu Dave said the marker could slide towards 12,000 in the coming weeks, until the uncertainty over interest rates, political worries and earnings outlook clears.
Equity strategist V. Venugopal said investors should use the market's slide to accumulate blue-chip shares that have already lost more than half their value.
"The near-term outlook is clearly bearish," he said. "But we are nearing the tipping point and the downside risk is narrowing down."
The primary cause for inflation has been high global oil prices propelled by heavy speculation as large funds moved into oil and commodities from falling equity and bond markets, Venugopal said.
After China raised retail fuel prices by up to 18 per cent, following increases in India, and sharp rises in Malaysia and Indonesia, the perception of huge demand should begin to ease and push oil prices lower, he said.
Venugopal said a sharp jump in the government's revenue receipts indicated quarterly earnings were robust despite concerns of an economic slowdown.
Direct tax collections jumped 71.3 per cent in the first two months of 2008/09 to Rs228.4 billion, the government said last week. "The robust growth in direct taxes has been achieved despite larger refund payouts at Rs90.14 billion," the Central Board of Direct Taxes said.
Corporate tax receipts in the April-May period climbed 68 per cent to Rs81.26 billion and income tax collections grew 73 per cent to Rs146.9 billion.
- The writer is a journalist based in India.
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