Indian shares surge 5.5 pct as market ignores rate hike

MUMBAI - Indian share prices snapped a five-day losing streak on Friday, gaining 5.5 per cent as investors shrugged off a surprise quarter-point hike in a trendsetting short-term lending rate.

By (AFP)

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Published: Fri 9 Jun 2006, 9:03 PM

Last updated: Sat 4 Apr 2015, 3:23 PM

But analysts said more losses could be in store for Mumbai’s benchmark Sensex stock exchange index, which was still down 22.2 per cent from its all-time high close of 12,612.38 points hit on May 10.

“It’s too early to say that the market has bottomed out. We could see at least 10 to 15 more days of consolidation,” said Soumeel Chakravarthy, a dealer at brokerage KJMC Capital Market Services.

The Sensex index climbed as much as 5.9 per cent to hit an intraday high of 9,849.2 before falling slightly to close at 9,810.46, up 514.65 points or 5.54 per cent.

The intraday jump of 553.39 points was the biggest in the index’s history. The previous record intraday gain was 426 points on March 24, 1992.

But trading volumes were too weak to sustain a recovery, analysts said.

“After a week of chaos, (some) money has come back into large cap, liquid stocks and favoured mid-cap stocks. But market breadth is still not strong enough,” said R. Balakrishnan, director at Parallex Consultancy Services.

“I would term it a relief rally rather than a distinct shift in the (bearish) trend,” he said.

The rally was driven by foreign and domestic funds and retail investors who were bargain-hunting, dealers said.

“Investors have stepped in to pick up large and mid-cap stocks which were battered,” said Manoj Kakaiya, dealer at brokerage ULJK Securities.

Stock markets across Asia have been caught up in turmoil triggered by last month’s decision by the US Federal Reserve to hike interest rates and forecasts of more tightening to come.

But Indian shares, which analysts say were among the most expensive, have been particularly badly hit.

The rally came despite a 25-basis-point rise announced late Thursday after the market’s close in the central bank’s key short-term lending rate to 5.75 per cent, the highest level in four years.

The rate rise came after the government announced sharp hikes in fuel prices earlier this week to bring them closer to world levels and staunch losses at state-run oil firms.

Analysts said further rate tightening could be expected in coming quarters that would likely slow growth.

“Part of the reason for raising rates is to put growth on a sustainable path rather than having it surge and create inflation issues,” said economist Rajeev Malik at JP Morgan in Singapore.

“But even if the economy grows by seven per cent in this fiscal year it will still be the second-fastest growing economy” after China, he said. The economy grew by an unexpectedly strong 8.4 per cent in the year to March 2006.

Friday’s rally came after the Sensex closed down nearly five per cent the previous day, as worries over rising global rates hit markets worldwide.

Before the Indian market rout began May 10, the Sensex had been up 34 per cent after gaining 42 per cent last year. It now is up 4.38 per cent so far in 2006.

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