The spike in inflation has triggered rate hike fears in the market, leading to correction in rate sensitive stocks in sectors like realty, auto, bank, NBFCs and capital goods on Tuesday.
Government data released on Monday said consumer price inflation (CPI) for April rose to 4.6 per cent from 4.3 per cent in March.
This led to economists forecasting two rate hikes by the RBI in 2018, first in August and then in October.
Follwing this rate sensitive stocks came under selling pressure even as benchmark indices Sensex and Nifty and the broader market swung in tandem with the trends in the Karnataka assembly election results.
Though Sensex and Nifty finally closed flat, the BSE Realty Index lost 1.90 per cent. The Bankex fell 0.11 per cent while the Auto Index fell 0.71 per cent and the Capital Goods Index fell 0.27 per cent.
The fall in some of the individual stocks, however, were far sharper, as the largest PSU bank, SBI, fell 1.87 per cent. Indiabulls Real Estate, down 5.17 per cent, led the fall in realty stocks. Among the auto stocks, Tata Motors fell 4.29 per cent and Ashok Leyland fell 2.58 per cent.
Radhika Rao, India economist at DBS, said, “Adverse base effects and seasonal factors are likely to drive headline inflation past 5 per cent by June- July 2018, before pulling back into the 4-5 per cent range” and added that, “The Reserve Bank of India is unlikely to be comfortable with the firm core inflation amidst the higher volatility in the bond and exchange rate markets.”
She said, “These factors validate our expectations for the RBI policy committee to veer towards a hawkish stance in June and pave the way for a plus 25 basis points increase in August. With another move likely in fourth quarter of 2018, we see room for cumulative 50bp hikes in FY19.”
Pranjul Bhandari and Aayushi Chaudhary, economists at HSBC India, said, "April CPI inflation came in higher than expected, even before all of the oil price rise has been factored in. Core inflation rose sharply, though food prices remained in check. We expect inflation to average 5.1 per cent in FY19, warranting two rate hikes in 2018, taking the repo rate to 6.5 per cent."