Nov. 6 (Bloomberg) -- Indian stocks dropped for a second day, led by banks, on concern the profitability of lenders may decline after they cut interest rates for customers more than depositors and after inflation accelerated faster than expected.

State Bank of India fell 4.4 percent after it cut its lending rate by 75 basis points, more than the 50 basis point cut in deposit rates. A basis point is 0.01 percentage point.

``It is feared the government's push to lower lending rates will hurt banks' interest margins,'' said R.K. Gupta, who manages about $90 million in equities at Taurus Asset Management Co. in New Delhi. ``There is also concern of a rise in bad debts.''

The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, lost 385.79, or 3.8 percent, to 9,734.22 at the 3:30 p.m. local time close of trading. The S&P CNX Nifty Index on the National Stock Exchange fell 102.3, or 3.4 percent, to 2,892.65. The BSE 200 Index slid 3.3 percent to 1,157.29. Nifty futures for November delivery fell 3.7 percent to 2,882.

State Bank of India fell 55.80 rupees, or 4.4 percent, to 1,216.70. ICICI Bank Ltd., the country's second-biggest lender after State Bank, dropped 17.45 rupees, or 3.9 percent, to 433.40. Housing Development Finance Corp., the nation's biggest mortgage lender, fell 92.5 rupees, or 5.3 percent, to 1,657.30.

India's inflation held near a five-month low, more than analyst expectations. Wholesale prices rose 10.72 percent in the week to Oct. 25 from a year earlier, the Commerce Ministry said today. Economists had expected a 10.49 percent increase.

Reliance, Tata Motors

Reliance Industries Ltd. retreated 7.8 percent to 1,170.55 rupees. The nation's most valuable company said newspaper reports that it shut five of its polyester manufacturing facilities near Mumbai are ``factually incorrect.''

Reliance, which runs the world's sixth-biggest oil refinery and is planning to double capacity, has no plan to move its polyester plants from Patalganga in the western state of Maharashtra to Nagothane, it said.

Tata Motors Ltd. fell 24.7 rupees, or 14 percent, to 157.5, its biggest intraday drop since Oct. 27. The company will shut its plant in the eastern Indian city of Jamshedpur for three days. Tata Motors is closing the plant to avoid an increase in inventory, it said in an exchange release.

Overseas investors sold a net 930 million rupees ($23 million) of Indian equities on Nov. 4, raising outflows from stocks this year to $12.5 billion, according to the nation's stock market regulator.

To contact the reporters on this story: Saikat Chatterjee in New Delhi at schatterjee4@bloomberg.net.

Last Updated: November 6, 2008 06:08 EST