Inflation rears its ugly head!

Inflation rears its ugly head!

A jump in weekly inflation drove benchmark Indian bond yields to 10-month highs and dragged shares lower on Friday as investors fretted that official interest rates may start rising from current three-decade lows.

The rupee , hit by a drying up of dollar supplies, closed at its lowest level for more than five months, though its weakness boosted shares in software exporters.

Government data released on Friday showed the wholesale price index rose 5.55 percent in the year to June 5, much higher than analysts' forecasts for a 5.08 percent rise.

The Bombay Stock Exchange's benchmark 30-share index fell 1.44 percent to close at 4,769.99 points. Most sectors fell as investors sold after Thursday's rise and traders lightened positions ahead of the weekend, but the inflation only made things worse.

"Inflation above five percent could mean that the soft bias on interest rates may not stay," said Navin Roy, an equity dealer at TAIB Securities.

"Sentiment was already down due to the rise in global oil prices and weak global markets, and this added to the weakness."

Following the inflation data, the yield on the 10-year benchmark bond jumped nearly seven basis points and ended up around 11 basis points on the day, on fears that the central bank will need to hike interest rates to contain the rise in prices.

The 10-year bond yield ended at 5.4924 percent. It last closed higher than this on August 22, 2003, at 5.5694 percent.

The rupee finished at 45.6650/6800 a dollar, nearly half a percent weaker than the day before and its weakest close since 45.71/73 on January 2.


Share prices fell across sectors, but cement and steel shares had already come under pressure earlier this week after the government hiked coal, petrol and diesel prices.

Gujarat Ambuja Cements fell 1.8 percent to 260.65 rupees, Associated Cement Companies dropped 1.2 percent to 229.80 rupees while Grasim Industries Ltd shed 1.6 percent to 915.35 rupees.

Steel Authority of India Ltd and Tata Iron and Steel Company, India's two largest steel makers, both fell three percent.

Banks also fell victim to worries that interest rates will rise and hit their bond trading profits.

Industry leader State Bank of India fell 2.6 percent to 437.45 rupees, while ICICI Bank Ltd, the second-largest, fell 1.7 percent to 258.40 rupees.

Tech shares, however, bucked the trend as investors saw value in these export-dependent stocks thanks to the rupee's fall.

"There has been some fund buying in techs as they have based their outlooks and guidances on a strong rupee," Roy said.

Sector bellwether Infosys Technologies Ltd rose 1.2 percent to 5,264.9 rupees while its nearest listed competitor Wipro Ltd gained 0.6 percent to 1,513.15 rupees.

The broader National Stock Exchange index fell 1.38 percent to 1,491.20 points.

Trading has been volatile in recent sessions, with average daily volumes on the Bombay exchange dropping to half the levels seen earlier in the year as investors fret over the economic policies of the communist-backed government which took power last month after an upset election win.

Volumes are expected to remain light till this uncertainty is cleared, with investors hoping that the federal budget, due on July 8, will throw clearer light on the government's policies.

Around 76 million shares changed hands on Friday.
farm Package to effect bank stocks

This recent news item does not bade well for bank stocks in general.

Looks like a further fall on Monday!!!

Readers Comments on the banking sector and bank stocks will be appreciated!!

NEW DELHI (Reuters) - India on Friday announced a package of measures aimed at helping farmers in distress and promised to increase the flow of credit to the key farm sector by around 30 percent in the year to March 2005.

Finance Minister Palaniappan Chidambaram told a news conference the government plans to increase farm credit by lending institutions to about 1.05 trillion rupees from 800 billion rupees a year earlier.

The announcement came weeks after a left-leaning central coalition headed by the Congress party swept to power after angry voters, who felt left out of the country's economic boom, ousted the previous government in the April-May election.

"This government speaks for the people. The farmers are in distress and we will take every step to protect those farmers," said Chidambaram.

The new government, which has promised to usher in reforms with a "human face", has vowed to protect the interest of farmers, who account for about 70 percent of the country's population of more than one billion.

Thousands of farmers are saddled with huge debts in India, driving many who are unable to repay their debts to commit suicide by consuming pesticides.

Chidambaram said the central bank and the National Bank for Agriculture and Rural Development (NABARD), will work out a plan to grant a one-time settlement for marginal farmers who have been declared defaulters and are not eligible for fresh credit.

"The scheme will enable such farmers to settle their accounts in a transparent manner and thereafter, access fresh credit," he said.

"Management of banks and cooperatives will be advised to review cases where credit has been denied on the sole ground that a loan account was settled through compromise or write offs."

He said debt restructuring instead of writeoffs would be undertaken by commercial banks after the RBI and NABARD, a bank which specialises in farm loans, draw up a roadmap.

Indian regulations require banks to lend up to 18 percent of net loans to the farm sector, which employs nearly three-quarters of India's population.

"Within prudential norms banks must lend to the farm sector. The non-performing assets (NPAs) in the agriculture sector are no more than the NPAs in the private industrial sector," said Chidambaram.

He did not agree with the view that the new package of measures would hurt the profitability of banks.

"Lending institutions must view agriculture as a sector where there are commercial opportunities for banks to lend and earn reasonable profits," said Chidambaram.

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