Inflation fears pull down Sensex by 156 points

A sharp gain in energy stocks today failed to arrest the drop in the broader market, with the BSE benchmark Sensex shedding 156 points as investors feared that a hike in auto and kitchen fuel prices would lead to very high inflation.

    
Investors withdrew funds apprehending RBI's intervention and a resultant increase in commercial lending rates that could make borrowings costlier for the industry.

    
Extending the loss for the second session in a row, the 30-share index of the Bombay Stock Exchange ended at 17,574. 53 points, down by 155.71 points, or 0.88%.

    
One of the market analysts felt that inflation has already entered the double digit regime and the petrol, diesel, LPG and kerosene price hike could have a chain reaction on price line.

    
As such, the government's chief economic adviser Kaushik Basu said the petro product pricing decision today would lead to a 0.9% point increase in monthly core inflation, which was 10.16% in May.

    
In tandem with the global markets, the bellwether started on a weak note and traded in negative zone for the entire day.

    
The market was under pressure on weak investor confidence across the globe and the government's decision to raise fuel prices further dragged it, with the Sensex plunging 183 points to touch a low of 17,546.73 in the final hour of trade.

    
In a landmark decision to bring petroleum products in line with market rates, an empowered group of ministers today gave its nod for raising of fuel prices, that pushed energy stocks upwardly even as the broder market was in red.

    
Analysts said while, the raising of fuel prices is a much needed move for oil marketing companies, it will have negative impact on other sectors and may push inflation upward, which may force the Reserve Bank of India to hike key policy rates.

    
Likewise, the National Stock Exchange's wide-based Nifty Index finished 0.97% lower at 5,269.05.

    
"The EGoM's decision was quite needed from the long term perspective but it may put some pressure on markets. The move, coupled with weak global sentiment, dragged the market today," Geojit BNP Paribas Research Head Alex Mathews said.

    
The government has freed petrol from all pricing controls and hiked diesel prices by Rs2 a litre, while households will have to pay an additional Rs35 per cylinder and poor man's cooking medium kerosene will be dearer by Rs3 a litre.

"As we are already facing high inflation and are on mercy of monsoon, this step is likely to increase worries. The move may lead to some correction in capital markets and bond prices may fall," SMC global head of research (equity-retail) Saurabh Jain said.

    
Energy stocks cheered the price hike move, with ONGC and Reliance Industries jumping sharply on the BSE. ONGC rose 6.35% and was the biggest gainer in the Sensex. RIL jumped 1.14%.