The new financial year has brought no good news for the bond and the capital markets. With inflation soaring to a three-year high, bond prices have crashed and the stock market saw across-the-board selling on fears of inflation eating into corporate profits.

Benchmark stock indices ended up to 3% lower. On Friday, the BSE Sensex dipped by 489.43 points, or 3.09%, to close at 15,343.12. The S&P CNX Nifty of the NSE shed 124.60 points (down 2.61%) to end the week at 4,647 points. This week, the Sensex lost 1,028.17 points, or 6.7% and Nifty 295 points, or 6.34%.

In the bond market, the 10-year benchmark 7.99%, 2017 paper ended at 7.98%, up 10 basis points from 7.88% on Thursday.

The most-traded 7.99%, 2017 has slipped below its par value intra-day as bond traders have persistently sold on the view that high inflation would force RBI to hike the cash reserve ratio (CRR) or any of the key rates, or even increase the ceiling on the market stabilisation scheme (MSS) to curb excess liquidity.

Lalit Thakkar, director research, Angel Broking, said, ?The WPI increasing to 7% is far above RBI?s comfort level of 5%. A large part of the inflationary pressures are coming from commodities where volume growth is a mere 5%. We believe monetary measures, which mainly address demand-side pressures, would not be the ideal tools to tackle this kind of inflation.?

Credit growth has already slowed down to about 21% from a peak of 30% plus. IIP numbers are showing a marked downward trend, he pointed out. ?We believe the government would do well to initiate further fiscal measures to tackle this essentially supply-side driven inflation instead of RBI increasing interest rates or CRR at this point,? he said.

The across-the-board selling in the market was evident from the squarely negative market breadth; of the total traded stocks only 808 ended in the green (30%), while 1,823 stocks ended in the red.

FIIs swung into the selling mode and were net sellers to the tune of Rs 849 crore. Domestic institutional investors were net buyers at Rs 580 crore.

Marketmen felt that going forward, though the domestic market will continue to take cues from overseas markets, domestic issues like inflation and liquidity will dominate.