Indian shares fell to their lowest in more than a year and government bond yields soared to seven-year highs on Wednesday after a surprise rate rise by the Reserve Bank of India (RBI) on Tuesday aimed at reining in inflation.Bank shares fell, with No. 2 lender ICICI Bank dropping as much as 4.3 percent to its lowest since Oct. 2006 on expectations loan demand would ease.
Lenders generally were expected to raise interest rates after the RBI lifted its key lending rate by an aggressive half a percentage point to a six-year high of 8.5 percent and increased reserve requirements for banks.
The RBI tightened policy after data late last week showed annual wholesale price inflation jumped in early June to a 13-year high of more than 11 percent. It was the second rate rise this month.
The finance ministry said the rate rise would moderate demand and inflation but should augur well for the overall economy, which expanded 9.0 percent in the last fiscal year.
Industrialists were less sanguine, with automotive suppliers, real estate and consumer products makers concerned about the impact of rising credit costs on investment and demand.
"The entire industry will feel the impact as the cost of cars will go up now, as well as manufacturing costs," Arvind Kapur, managing director of auto parts maker Rico Auto Industries Ltd, said.
BOND YIELDS TO RISE FURTHER?
The partially convertible rupee, which has been under selling pressure from capital outflows and a widening trade deficit in recent weeks, gained 0.3 percent to 42.8625 per dollar.
Traders said foreign investors were buying Indian bonds to lock-in the higher yield, which in turn boosted the rupee. Exporters bought the rupee in anticipation of further gains.
The rupee hit a 13-month low of 43.21 in late May, but traders say the central bank has been supporting it since to prevent costlier imports from stoking inflation.
The benchmark 10-year bond yield jumped to 8.86 percent in early trade, a level last tested in October 2001, from a close at 8.57 percent on Tuesday, before the rate move.
"We should see 9.10-9.20 percent on the 10-year yields in the near term," said Suresh Pai, chief dealer at Canara Bank.
The benchmark share index fell 2.6 percent to its lowest since May 2007. It stood down 0.5 percent at 0700 GMT.
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