The Hindu Business Line : Another dismal week on the cards

The stock market is all set to witness another dismal week as news emanating from all corners — global and domestic levels — paint a grim picture. More than anything else, inflation is likely to weigh down on the market sentiment.

The Government’s recent move to hike petrol and diesel prices by Rs 5 a litre and Rs 3 a litre respectively and that of liquefied petroleum gas (LPG) by Rs 50 a cylinder may have a cascading effect on inflation, considering their higher weightage in the WPI (wholesale price index).

Already there are fears that the inflation rate, which is at an unacceptable level, is likely to cross 9 per cent in the weeks to come and may even move to double digits.

In its recent edition, The Economist said that India’s inflation rate may be revised to 10 per cent.

The London-based publication in its cover story on global inflation said: “India faces the challenge of high inflation in the coming months, especially due to rising international crude oil and food prices.

“Prices are also rising partly because loose monetary conditions in emerging economies have boosted domestic demand,” the journal said.

A further rise in inflation would trigger a sharp reaction from Reserve Bank of India, which has already indicated that it will take tough measures to tackle it. More likely, the RBI might prefer a hike in cash reserve ratio for the banks, which could dry up liquidity, to tame inflation.

There are also talks that the RBI might hike short-term interest rates, as the RBI governor had said the situation was extraordinary in respect of oil prices and that the basic approach of the bank was to carefully manage liquidity conditions.

Deficit woes

Rising oil prices and inflation could pose major problems to the already mounting deficit situation. Rising crude oil prices are likely to put pressure on the deficit front, as 70 per cent of domestic oil consumption is sourced through imports.

This means problem for oil marketing companies (OMCs), which could face higher under-recoveries, as the oil price offered to the common public is hugely subsidised.

Last week, the Government indicated issuance of oil bonds worth Rs 95,000 crore to reduce the burden of OMCs.

But this, it is feared, won’t solve the problem, as the oil bonds issuance has been ballooning rapidly, both in absolute terms and as percentage of the gross domestic product, thereby raising concerns of fiscal stress.

However, any positive news on the monsoon and short covering in the futures and options market could lift the sentiment during the later part of the week.