Markets slip on rate concerns

09 June 2007

Indian stock markets corrected this week, as global markets sold off on receding hopes of lower interest rates. Annual Indian inflation fell to its lowest this year, but India''s central bank may hike rates shortly as growth remains robust and liquidity is very high.

Stocks have been gaining over the last couple of months on expectations that a global growth slowdown would encourage central banks to bring down interest rates. However, most global economies have done surprisingly well in the first quarter. Though the US fared worse than expected in the first quarter, growth there is likely to gather strength in subsequent quarters. Most central banks are now expected to keep their key rates steady and in some cases modest hikes are not ruled out.

The MSCI India index lost 5.09 per cent for the week in US dollars as compared to losses of 2.28 per cent for the MSCI Emerging Markets index. In India, automobile stocks were among the biggest losers as May sales data indicated a slowdown in demand. Banking stocks declined on worries that India''s central bank would tighten their reserve ratios besides hiking interest rates. Stocks of technology and outsourcing service providers, which have under-performed the market in recent months, made modest gains as the US dollar gained against the rupee.

For the year, MSCI India index has returned 10.57 per cent in US dollars as compared to 11.72 per cent returned by MSCI Emerging Markets Index. Returns in Indian rupees on the MSCI India index for the year are substantially lower 2.77 per cent because of the rupee appreciation against dollar.

Among Indian large-cap domestic indices, the 50-share Nifty index at the National Stock Exchange lost 3.54 per cent for the week. The 30-share BSE Sensex lost 3.48 per cent for the week.

Inflation falls to lowest level in 2007: Wholesale price inflation slipped to the lowest level in recent months on cheaper farm produce. The high base effect also contributed as annual inflation fell to 4.85 per cent for the week ended 26 May, as compared to 5.06 per cent for the previous week.