Indian shares are expected to fall this week on inflation worries and uncertainty over global crude oil prices, while bonds are likely to rise after the government lowered duties on petroleum products and some commodities.
Stock traders said a sustained rise in inflation, which shot up to a 3 1/2 year high of 7.96 percent in the week ended August 7, has sparked worries about higher interest rates, which could choke growth in Asia's fourth-biggest economy.
"If inflation stays firm, interest rates could harden and that will hurt expansion plans of corporates," said Sashi Krishnan, the chief investment officer at Cholamandalam Asset Management.
Those worries have dragged the key Bombay share index down 2.5 percent in the last two weeks. The marker has now lost 14 percent in 2004, making it Asia's worst performer.
Fund managers say they will stay out of sectors that are sensitive to interest rate hikes, and instead move into commodity and technology sectors that are less likely to be affected by rising, which are currently at a three-decade low.
Sethuram said he was bullish on the cement sector over the medium to long-term, because strong demand and an absence of fresh supply will improve the commodity's prices.
Some traders also said the ongoing truckers' strike could raise inflationary pressures. Thousands of truckers are keeping their vehicles off Indian roads in protest against a proposed 10 percent service tax on freight booking agents.
Federal bonds are expected to gain slightly this week after the government lowered duties on petroleum products and commodities, such as steel, in a bid to tackle soaring inflation.
Bond traders seemed more convinced than share traders that last week's cuts will help lower inflation, which has been spurred by high commodity prices and record-high prices of crude oil, India's biggest import item.
The yield on the benchmark 10-year bond, the 7.37 percent security maturing in 2014, ended Saturday at 6.5485 percent, off 6.6244 percent a week earlier, which was the highest in nearly one-and-a-half years.