Indian shares fell for the third day on Thursday, shedding 0.6 percent after a sharp rise in food prices heightened concerns the central bank may tighten monetary policy more harshly than expected. Financial stocks were among the big losers as higher interest rates could douse loan demand and squeeze the margins of banks.
The food price index rose 18.32 percent in the 12 months to December 25, the highest in more than a year, government data showed on Thursday. The fuel price index climbed 11.63 percent. "This number reinforces the base case scenario of a 50 basis point rate hike in January," said Hitendra Dave, head of global markets at HSBC India.
"One has to be prepared now for a much larger frontloaded rate hike series than what one was expecting say a month ago."
The Reserve Bank of India is scheduled to review policy on January 25, and a Reuters poll on Wednesday forecast at least a 25 basis point increase in key rates.
Leading lenders State Bank of India and ICICI Bank dropped 2.7 percent and 1.6 percent respectively. Mortgage firm Housing Development Finance Corp shed 0.2 percent.
India needs to speed up its return to pre-crisis monetary and fiscal policies to help bring down elevated inflation, the International Monetary Fund said on Wednesday. The 30-share BSE index fell 0.57 percent, or 116.36 points, to 20,184.74, its lowest close in a week. Two-thirds of its components ended lower. The 50-share NSE index declined 0.5 percent to 6,048.25.
In the broader market, volume was low at 290 million shares on the BSE, with losers beating gainers in the ratio of 1.9:1.
Oil Natural Gas Corp's slipped 3.2 percent after Chairman R.S. Sharma said profitability in the December quarter may be hit due to higher subsidy payout to refiners and higher global crude oil prices.
However, export-focused outsourcers Tata Consultancy Services and Infosys Technologies rose to record highs on an optimistic outlook for the year ahead.
Analysts at BNP Paribas said in a note there was strong near-term demand visibility for Indian IT companies.
TCS and Infosys closed 1.4 percent and 0.2 percent higher respectively. Quarterly corporate results due from next week are expected to show robust growth, and investors would be watching for management comments on outlook for direction.
Foreign funds have bought around $270 million of Indian equities in the first two trading sessions this year, after pumping in a record $29.3 billion in 2010.
Tata Steel firmed 0.4 percent after New Millennium Capital Corp said it received environmental approval for its iron ore project with the Indian steelmaker and the joint venture partners expect to begin production by the second quarter of 2012.
Separately, Riversdale Mining said the company and joint venture partner Tata Steel have reached an agreement allowing them to fully own the $1 billion Benga power plant project in Mozambique. Energy giant Reliance Industries, which has the highest weight on the main index, gained 0.9 percent. The stock had underperformed the main index in 2010, falling nearly 3 percent.