It's a bit of a Catch-22 situation for investors in Indian shares. Despite stronger signals of a gloomy world economic outlook and rapidly slowing domestic growth, the central bank is widely expected to deliver another rate increase to rein in high inflation.
Factories across the world are struggling in the wake of a slump in consumer spending and shaken business confidence. Data last week showed PMI readings in the Euro-zone, Britain and China dropping below 50, or contracting, in August.
India was one of the few countries still showing growth, but the HSBC Markit Indian Manufacturing PMI at 52.6 was the lowest since March 2009, when it had dipped below 50.
"The writing on the wall is clear and blunt," said equity trader Kevin D'Souza. "Some economies are already in sick bay; India is relatively better off but there are worrying symptoms."
The Reserve Bank of India (RBI) has been battling inflation for a very long time by tightening monetary policy. It has raised interest rates 11 times since mid-March last year and yet headline inflation remains hovering near double digits.
For a nation with more than 1.2 billion people, price rises especially in food can foment social unrest and policymakers are worried. Latest data showed food inflation climbed above 10 per cent, while fuel and primary articles have all been in double digits for some time.
Montek Singh Ahluwalia, the influential deputy chairman of the Planning Commission, said high prices of grains and vegetables were a serious concern after food inflation accelerated to 10.05 per cent, the highest in almost six months, in the week to August 20.
With monsoon rains picking up in most regions, farm output this year should be good. But the problem is India lacks investments in food preservation technology such as refrigeration and adequate warehouses. And a large part of bumper crops are usually wasted or damaged.
No amount of monetary tightening would help stem this rot. Policymakers acknowledge large retail chains like Wal-Mart and Carrefour could be the answer to help build the infrastructure for improving supply lines, but the government lacks the political will to push through key reforms for this happen.
And rate increases have dealt a serious blow to consumer spending, corporate investments, jobs and economic growth. Gross domestic product expanded 7.7 per cent in April-June, data last week showed, the slowest pace in six quarters and well off nine per cent a year earlier.
Construction rose just 1.2 per cent, down from 7.7 per cent a year ago, as high borrowing costs dampened the housing sector and large projects were stalled by delays in approvals.
In Mumbai, home sales plunged to a 30-month low in the June quarter, leaving the biggest Indian city with more than 100 million square feet of unsold real estate, Liases Foras Real Estate Rating and Research said.
Maruti Suzuki, which makes every second new car sold in India, reported a 12.7 per cent drop in August sales, its third consecutive monthly fall.
The RBI, like all central banks, believes fighting inflation even at the cost of denting growth is par for the course. And the consensus forecast is it would raise rates by another 25 basis points on September 16 when it is scheduled to announce policy.
For all the downbeat outlook, the top-30 Sensex snapped a five-week slide and recouped 6.1 per cent last week to 16,821.46, as foreign funds scooped up beaten down stocks on expectation the worst was already in the prices. The widely-tracked benchmark had slumped 15.3 per cent over the previous five weeks, and is down just over 18 per cent since 2011 began.
After the Indian market closed a disappointing US jobs report sent world stocks sliding, casting a dark shadow on the outlook for this week. There will be greater pressure on the US Federal Reserve to launch another stimulus package to avoid a second-dip recession, a move if it materialises should prompt a stocks rebound.