Inflation rose to over three months high of 5.26 per cent for the week ended October 14, from 5.16 per cent in the previous week mainly due to increase in the prices of food and manufactured items.
The NSE Nifty gained 57 points to close at 4,142.
The rupee snapped 2-day rise to end weaker against the dollar on Thursday.
On the eve of busy season Credit Policy, Finance Minister P Chidambaram on Monday said the government and the Reserve Bank will take necessary steps to keep inflation moderate and foster growth in the economy.
Bankers expect interest rates to remain stable in the short to medium term, as there is enough liquidity in the market.
Declared semi-annually (i.e. March and September), the Monetary Policy takes stock of the economy's liquidity and inflationary conditions and employs the necessary tools to revive it.
Reserve Bank on Tuesday kept the bank rate and CRR unchanged, but hiked repo and reverse repo rate by 0.25 per cent to 5.5 per cent and 6.5 per cent respectively as part of measures to rein in inflation.
The Sensex dropped to a low of 12,908 in noon deals before finally closing with a loss of 62 points at 12,962.\n
Bankers see upward pressure on interest rates after the Reserve Bank raised two key short-term rates in the busy season credit policy of October.
The Reserve Bank of India has set up an experts committee to implement Basel II accord by 2006 to strengthen the financial health of banks by adopting globally accepted norms for capital adequacy.
The markets were witnessing volatility in the opening trade.
In the run-up to the slack season Credit Policy, bond dealers have asked the Reserve Bank of India to permit them to raise funds through external commercial borrowings and enable them to trade in international securities.
The Reserve Bank of India Governor Y V Reddy expects credit to pick up. When credit demand picks up, adequate liquidity will be provided, he said.
The government on Thursday ruled out any downward revision of the 12 per cent export growth target set for this year
In what could trigger another round of rate cut war, National Housing Bank on Wednesday slashed lending rates by 0.40-0.65 per cent just two weeks before the Reserve Bank of India announces its busy season credit policy.
The Sensex opened with a huge positive gap of 53 points at 7,974, but dropped to a low of 7,921 in early morning deals.
Projecting 6-7 per cent growth this fiscal, government on Monday ruled out further duty cuts and favoured 'benign' interest rates to ensure that the measures to contain inflation did not hamper growth.
Income and long-term gilt funds will continue to outperform the broad market indices in the long term as trading gains will add to the total returns, according to a Merrill Lynch Mutual Fund Debt survey.
Investors must have a debt component in their portfolio to provide the much-needed hedge against volatility in equity markets.
Expressing optimism over the developments in the economy, Reserve Bank of India on Monday pegged the GDP growth for 2004-05 in the range of 6.5-7 per cent
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