Inflation jitters keep markets on edge

Finance Ministry zeroes in on 9 commodities for duty cut

The spectre of inflation continued to haunt the markets with the call money rates jumping to 5.2 per cent at close today from an average 4 per cent and the Sensex shedding 77 points to close at 5,175 points on fears that the government might cap commodity prices.

The call money market rates hit an intra-day high of 5.7 per cent as the interbank money market started feeling the pinch of liquidity moving out of the system. The benchmark 10-year paper yield, too, closed higher at 6.64 per cent after reaching an intra-day high of 6.75 per cent.

It was only after Reserve Bank of India (RBI) Governor YV Reddy talked of a measured approach to manage price pressures that bonds recouped some of their early losses. "The RBI is monitoring developments carefully. In particular, it is analysing how the imported oil shock is turning out to be globally and how it is being absorbed domestically," Reddy said in Mumbai.

Meanwhile, Finance Minister P Chidambaram's warning yesterday to manufacturers against raising prices had a negative impact on the prices of steel, cement and oil scrips with gains of 1.05 per cent made over the last two sessions being wiped out in a day.

Finance ministry officials said the government had zeroed in on nine commodities where the Customs duty could be cut. While no final decision had been taken, the identified commodities included those that had led to the sharp spike in inflation. Steel, crude oil, iron ore, sugar and edible oils were some of the products where duties could be cut, they said. In an interactive session with PTI, Chidambaram said inflation was expected to settle down by September. "Fiscal and monetary steps will be taken in a measured manner. There will be no panic or knee-jerk reaction. We have told the RBI to take necessary monetary steps and we will look at options on the fiscal side," he said.

Terming the spurt in international oil prices as "totally unexpected and unanticipated", he said this was beyond the control of the government and had fuelled inflation to 7.51 per cent for the week ended July 24.

"Inflation is a matter of concern always. Even when it is at 4 per cent, attempts would be made to bring it down to 3 or 2 per cent. It is always a matter of concern until you kill the beast of inflation," Chidambaram said.

Bond dealers said liquidity was distinctly tighter in the market as banks bid only Rs 2,000 crore in the RBI's repo window as against a daily average of Rs 8,000-9,000 crore in recent weeks. The tight liquidity was because of the RBI's interventions in the forex market. The central bank has been selling dollars to cool, with every dollar sold sucking out an equivalent amount of rupees from the system.

The dealers said though the RBI had not resorted to direct measures of draining liquidity like an increase in the cash reserve ratio or the repo rate, it had been selling dollars for the last two weeks continuously to support the rupee. In the process, foreign exchange reserves had decreased by almost $2.7 billion to $118 billion from a high of around  $122 billion.

In the gilts markets, bond prices fell by almost Rs 1.50 during the day but recovered later on the back of the RBI governor's statement that the central bank would take "measured steps" to rein in inflation.