Indian stocks fall on inflation surge

Indian shares and bonds fell on Friday after inflation spiked to a 3-1/2 year high, causing more concerns about interest rates rising off 30-year lows before the end of the year, which would choke off demand in the economy.
Government data out on Friday showed wholesale price inflation jumped to 7.51 percent in the year to July 24, up from 6.52 percent a week before and 4.32 percent in late April. Inflation has not been this high since February 2001.
A Reuters poll conducted on Thursday had estimated inflation would have risen to 6.70 percent in the year to July 24.
"Clearly if inflation spins out of control, there are a lot of downstream issues that would bother markets," said C. Jayaram, a director of Kotak Mahindra Asset Management.
"One of the worries is that a sustained rise in inflation would lead to a hardening of interest rates. And that will eat into corporate profits."
The Mumbai Stock Exchange's benchmark top-30 share index fell as much as 1.6 percent, and closed 1.06 percent lower at 5,196.99 points.
Refinery stocks were pulled down by a record-breaking rally in global crude oil prices. The largely government-owned sector still lacks total freedom to raise products prices, so its margins are exposed to sharp rises in the cost of crude.
Hindustan Petroleum Corporation Ltd fell 2.4 percent and Indian Oil Corporation Ltd lost 4.5 percent.
Inflation has been steadily picking up pace in recent months because of rising fuel and commodity prices, which have tracked global trends and raised input costs for manufacturers. Analysts say those rising costs could soon be passed on to consumers.
Bonds fell on worries the central bank may raise rates to curb inflation in Asia's fourth-largest economy.
The benchmark 10-year bond yield rose to 6.2750 percent, rising nearly 16 basis points after the inflation data was released. It had closed on Thursday at 6.1365 percent.
"The jump (in inflation) is rather sharp. It signals the scope for realignment of interest rates," said Bandi Ram Prasad, chief economist at the Mumbai Stock Exchange. "The policy makers will respond to it."