Indian shares fall as inflation and rate jitters grow

New Delhi: Indian shares fell 1.3 per cent on Friday as jitters about inflation and higher interest rates sent investors scrambling to cut positions after the market rose more than one per cent early.

Sentiment was also weighed down by heavy foreign fund selling last week, with data showing they had dumped shares worth $879 million in the four days to Thursday.

Annual inflation rate in late May rose to 8.24 per cent, the highest since August 2004, data showed. With higher fuel prices expected to send it to a 13-year high, above nine per cent, traders were worried about monetary tightening.

"The rise in inflation and the potential rate movement continue to remain as a fear factor," said Nipun Mehta, a Mumbai-based investment adviser, who expects inflation to climb above 10 per cent.

Reserve Bank of India Governor Y.V. Reddy said on Thursday the central bank was ready to use the full range of instruments at its disposal to curb inflation.

The 30-share BSE index closed 1.25 per cent, or 197.54 points, lower at 15,572.18. The benchmark had started 0.9 per cent higher and rose as much as 1.3 per cent before turning negative.

For the week, the index fell 5.1 per cent, its biggest weekly slide since early April, and the third weekly drop in a row.

In the broader market, losers beat gainers 1,526 to 1,122 on volume of nearly 272 million shares.

"I don't think the market will see a recovery soon," Mehta said. Foreign funds have pulled out $4.8 billion from Indian shares in 2008, pushing the BSE index down more than 23 per cent in the period.

"It's a wait and watch policy," said K.K. Mital, CEO at Escorts Mutual Fund, until the uncertainty about rate outlook and inflation worries subside.

Top tobacco maker ITC led the losses, falling 4.1 per cent to Rs213.15 with Bharti Airtel losing 2.3 per cent to Rs802.05, its lowest close in almost two months.

Reliance Industries ended 0.4 per cent lower at Rs2,239.35 after rising as much as 2.3 per cent earlier in the session. The company said a unit in its plant in western Maharashtra had been shut by a fire.

ONGC slipped 1.5 per cent to Rs938.50 on profit taking. It had risen more than 13 per cent in the previous two days.

The 50-share NSE index lost 1.05 per cent to 4,627.80.