The outlook for the market remains grim for the near term as steaming inflation, record high global crude oil prices and high interest rates threaten the pace of growth in the world's second fastest expanding major economy, driving investors to the sideline or to exit.
The wholesale price index rose 11.42% in 12 months to 14 June 2008, above the previous week's annual rise of 11.05%, government data released on Friday, 27 June 2008, showed. Inflation for the year through 19 April 2008 was revised upwards to 8.23% from 7.57%.
To tame inflationary pressures, the Reserve Bank of India (RBI) on 24 June 2008, raised its key lending rate viz. the repo rate by 50 basis points to 8.5% with immediate effect, its highest since March 2002 and the second hike this month. The RBI had earlier on 11 June 2008, raised the repo rate, by 25 basis points to 8%.
The RBI also increased the cash reserve ratio, the ratio of deposits banks must keep with it, to 8.75% from 8.25% in two 25-basis-point stages on 5 July 2008 and 19 July 2008.
Foreign investors, who usually set the trend for the market, have been withdrawing relentlessly this year. FIIs dumped shares worth Rs 9349.60 crore in the month of June 2008 (till 26 June 2008). FII outflow in calendar year 2008 totaled Rs 24,719.10 crore (till 26 June 2008).
Political factors will also weigh on the market due to the ongoing confrontation between the government and Left parties over the Indo-US nuclear deal. The UPA-Left coordination committee on Indo-US nuclear deal on 25 June 2008 decided to meet again later. Foreign Minister Pranab Mukherjee said the committee completed its discussions on all aspects of the nuclear deal. The next meeting of the committee will finalise its findings.
The Left parties have already made it clear that they will withdraw their support to the government if it moves ahead with the nuclear deal. Left parties are opposing the deal saying it undermines India's independent foreign policy and nuclear weapons program.
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.
Crude hit a record of $141.71 on Friday, 27 June 2008 after Opec President, Chakib Khelil predicted that the oil prices could rise to $150-170 a barrel in the next 3-4 months. Rising crude oil remains a major worry as India imports close to 70% of its crude requirements