Equity benchmarks ended weak on Tuesday, erasing early gains, in the absence of follow-up buying amid concerns over persistent inflation and its impact on companies profits. Analysts said any rebound in Indian shares in the coming sessions, led by a stronger overseas market, could result in investors using the upside to further trim exposure.

For any sustained buying, it is felt that inflation should subside, which is unlikely, according to them.
BSE 30-share Sensex closed at 16,275.59, down 72.91 points or 0.45%, after touching a high of 16,506.35. NSE 50-share Nifty ended at 4,859.80, down 15.25 points or 0.31%. Bears consolidated their position in the broader market, with losers trouncing gainers 1,760:922 on the BSE and the mid- and small-cap indices falling over a percentage.

Analysts forecast further rise in inflation, even to double digits, once the government hikes its administered auto fuel prices. Investors are concerned that higher inflation may lead to a series of monetary tightening steps by the Reserve Bank of India (RBI), which is expected to keep interest rates at the existing levels.

The sharp rise in inflation to 8% from 5% in the past few months has invited a slew of measures from the government and the central bank, but is yet to yield the intended results.

The prevailing interest rate scenario, which is considered high by many, has been held responsible for the slowdown in consumer spending and delay in investment plans of companies. This kind of uncertainty is expected to stay in the near future, as it will take at least three to four months for the inflation to soften considerably. But, any signs of softening will be taken positively, said a fund manager with a European-bank-owned mutual fund.

Uncertainty over the impact of rising inflation on Indias growth has resulted in foreign institutions cutting their positions in Indian shares. Both benchmarks are off roughly 20% from their highs in January. On Tuesday, foreign institutional investors net sold Indian shares worth Rs 496.61 crore, while domestic institutions net bought to the tune of Rs 529.69 crore, according to provisional figures on NSE.

Elsewhere in Asia on Monday, most markets ended higher. Japans Nikkei and Topix rose 1.5% and 1.8% each. Hong Kongs Hang Seng gained 0.6%, while Singapore Straits Times Index moved up 0.4%.