Sensex slides as fears of more RBI action rise

MUMBAI: Equity benchmarks fell 1.5% on Friday, as persistent inflationary pressures, coupled with rising oil prices, heightened fears of further monetary tightening by RBI. Analysts fear that further moves to absorb money supply from the banking system would delay reversal in the interest rate cycle and weigh down economic growth.

The BSE Sensex fell 257.47 points or 1.52% to close at 16,649.64. NSE Nifty fell 78.9 points or 1.57% to close at 4,946.55. Mid and small-cap shares, which have outperformed their frontline counterparts in recent sessions, also succumbed to the bear onslaught on Friday, with losers outnumbering gainers 1924:795 on the BSE. Optimists are concerned about Nifty breaching a key support level of 4,950 on Friday. Technical analysts feel that if the index closes below this level for a few more sessions, there could be further downside.

Weak European markets added to the discomfort of the bulls in India. Elsewhere in Asia, all markets, with exception to Japan, ended roughly 1% lower after a flat opening. US equity market futures too were trading lower few hours before the opening of the markets there.

Back home, sustained rise in crude prices is expected to force the government hike the administered auto fuel prices. Any such move is likely to drive inflation higher, with some analysts estimating double digit inflation over the next couple of months.

“In spite of weakening domestic macro fundamentals, inflation continues to rise, money supply growth remains above RBI’s target level and liquidity overhang shows no signs of abating. With CRR (cash reserve ratio or the amount banks need to keep with the RBI in cash) becoming the instrument of choice for RBI, further hikes in CRR cannot be ruled out in our view, though we expect no action on policy rates,” brokerage India Infoline in a recent client note.

Inflation data for the week ended May 10 stood in line with market expectation at 7.82% as compared to 7.83% for the week earlier.

But, optimists have not given up hope. “We don’t see significant downside to the markets from these levels. As our strategy, we have started deploying some cash in the markets. Going forward, investors will have lot of opportunities to invest as there is also a healthy pipeline of IPO,” says Kotak Securities senior VP and head-PMS Kunj Bansal.

As per the provisional data, foreign institutional investors (FIIs) have been net sellers of Rs 654 crore, even as domestic institutional investors (DIIs) absorbed the selling by buying into Rs 750 crore on Friday.
Combined turnover in the cash and derivatives segment on both the stock exchanges stood at approximately Rs 60,000 crore, lower than previous day’s about Rs 65,000 crore. The turnover was lower as investors stayed away from taking new positions due to last session of the week.