RBI is expected to hike interest rates on Thursday for the 10th time in 16 months as it struggles to rein in the highest inflation rate of any large Asian economy.
The wholesale price index - the government's preferred measure of the cost of living - accelerated a faster-than-forecast 9.06 per cent in May.
The figure was especially disappointing given the increasingly tight monetary policy of the Reserve Bank of India (RBI), which holds its mid-quarter meeting on Thursday.
After raising interest rates in gradual, quarter-point steps to minimize the impact on the economy, the RBI announced a hike of 50 basis points in May, with governor Duvvuri Subbarao warning that short-term growth may have to be sacrificed in the fight against inflation.
The Sensex opened lower before the meeting, as investors sold heavily in anticipation of a hike.
The benchmark 30-share index on the Bombay Stock Exchange, which closed down 176.42 points to 18,132.24 on Wednesday, dropped a further 126.42 points or 0.69 per cent to 18,005.82 Thursday morning.
Interest-sensitive banking, real estate and auto stocks in particular were under pressure.
The surge in the cost of living was initially triggered by spiralling food prices and then exacerbated by rising global commodity prices and higher fuel costs.
Economists say inflation has now spilled over into the general economy, pushing up wages and other costs.
"The headline inflation rate remains extremely sticky at around the double-digit mark," said Robert Prior-Wandesforde, India and South East Asia Economics head at Credit Suisse.
In a note to clients, Prior-Wandesforde called the May inflation data a "horror show" and way above the RBI's comfort level of 5.0-6.0 per cent.
Source: The Economic Times
Vivek Agrawal
Summer Intern-Fundamental Analysis
DENIP Consultants Pvt. Ltd.
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