Dalal Street slumped by nearly 3 per cent as inflation surged to a three-year high of 7 per cent on Friday. With nervous investors unloading shares, fearing monetary tightening measures like a hike in cash reserve ratio (CRR), the 30-share BSE Sensex ended down 489.43 points or 3.09 per cent at 15,343.12. The broader based S&P CNX Nifty was down 124.6 points or 2.61per cent at 4,647.

Banking stocks fell after concerns of possible Reserve Bank of India (RBI) intervention to rein in inflation. Capital goods and power stocks also declined. Bharat Heavy Electricals (Bhel) and HDFC were major losers whereas Ranbaxy Laboratories and Tata Steel were top gainers from the Sensex pack.

Alex Mathew Head of Research, Geojit Financial Services, said, “rising inflation coupled with expectation of CRR hike by the RBI had a negative impact on the market.”

Prospects of further monetary tightening by the Reserve Bank of India following a surge in inflation is a cause for concern at a time when the already high rates are pinching the domestic industry. The surge in inflation has triggered fears that the RBI may raise cash reserve ratio (CRR). A CRR hike would suck out liquidity immediately pushing up the cost of funds and thereby curbing demand.

“The overall sentiment is down in the market and it knows that controling inflation will remain a challenge,” said Chetan Shah, senior portfolio manager at Religare Securities. The Sensex, which is down 24.4 per cent this year, fell 6.3 per cent on the week, its fourth fall in the past five weeks.

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