High Inflation report to keep Stock Market subdued

High Inflation report to keep Stock Market subdued

Rising inflation will keep Indian stocks from making significant gains this week while bonds are expected to rise after the Reserve Bank of India last week allowed banks to defer booking paper losses on federal bond investments.

Shares gained 2 percent last week, boosted by newly listed Tata Consultancy Services Ltd., but were unlikely to rise much further in the run-up to the earnings season next month, traders said.

The 30-share Bombay Stock Exchange index has traded in a broad 200-point range since August and this trend was likely to continue this month, they said.

Last week's gain came despite data that showed inflation rose to a three-and-a-half year high of 8.17 percent in the year to Aug. 21 on higher energy and food prices.

Inflation and oil price concerns will keep the market trading in a range and cap the upside. We're not going to see a big rally any time soon.

Analysts expect investors to continue favouring textiles, paper and metals stocks. Software is seen in investor focus after the listing of Tata, India's biggest software exporter, and because the sector is seen as relatively protected from inflation and oil price volatility. Tata shares ended the week at 997.95 rupees, up 17 percent from their IPO price of 850 rupees.

Shares of state-run banks, among the biggest investors in federal bonds, are also seen gaining from the central bank's move to relax rules governing their investment portfolios to cushion them from huge losses from a recent spike in government yields.

Prices of crude oil, India's biggest import item, firmed above $44 a barrel last week on fresh attacks in Iraq, raising concerns it will further drive up local and put upward pressure on interest rates.

"There are no major triggers until the next earnings cycle (in October), so until then there will be interest in mid-cap stocks and investors will look to oil prices and weekly inflation data for direction.


Apart from this RBI directive, traders say bonds would get a further fillip if the federal government decides to borrow funds this week through an issue of short-dated securities or floating rate bonds.

According to the central bank's issuance calendar, the government will issue two bonds between Sept. 2 and 9. One will have a 5-to-9 year maturity for 60 billion rupees. The other will be in the 15-to-19 year segment for 40 billion rupees.

A floating rate bond is treated like a short-dated security as it is usually benchmarked to a 364-day treasury bill and is used by banks to hedge in an uncertain interest rate environment.

The yield on the benchmark 10-year bond ended at a one-and-a-half-month low of 5.8823 percent on Saturday, down from 6.0260 a week earlier and nearly 77 basis points off an 18-month closing high of 6.6519 percent on Aug. 12.

Yields had risen to multi-month highs on fears of monetary tightening and inflationary pressures.
Back then inflation was the biggest concern for the Indian stock markets. Now it is no longer a big concern. See where the inflation is today. It lurks in the negative shadows.

In reality people are finding everything costlier than earlier, whereas the ridiculous inflation index shows a negative value. Perhaps we should have inflation index not just over a year but also over a five year period!

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