India’s Sensex Index Declines; State Bank, ICICI Bank Retreat

India’s benchmark stock index fell. Lenders led declines amid concern that competition for funds will increase costs and lower loan profitability.

State Bank of India, the nation’s biggest lender, dropped to a one-week low after increasing the rate it pays customers for deposits by as much as 1.5 percentage points. A wider gap between lending and deposit rates may reduce lenders’ earnings growth, Macquarie Group Ltd. wrote in a note to investors. ICICI Bank Ltd. dropped the most since May.

“We are increasing our cash levels,” said K.K. Mital, a New Delhi-based fund manager with Globe Capital Market Ltd. “The banks are raising deposit rates without a commensurate increase in lending rates. Foreign fund flows are also slowing down.”

The Bombay Stock Exchange’s Sensitive Index, or Sensex, declined 35.54, or 0.2 percent, to 19,945.77 at 2:01 p.m. in Mumbai. The S&P CNX Nifty Index on the National Stock Exchange slid 0.3 percent to 5,974.45. The BSE 200 Index lost 0.5 percent to 2,485.51.

State Bank retreated 2.3 percent to 2,883.8 rupees, extending yesterday’s 3.9 percent slide. The lender today increased the amount it pays for deposits by 50 to 150 basis points, according to its statement yesterday. A basis point is equivalent to 0.01 percentage point.

‘Desperate for Growth’

State Bank’s net interest margin, a measure of lending profitability, will narrow in the second half of the year ending March 31 because of the deposit rate increases, Manish Karwa, M.B. Mahesh and Nischint Chawathe, analysts at Kotak Institutional Equities, said in a note to clients today.

“Banks may become desperate for deposit growth and are likely to enter into a deposit rate war,” Suresh Ganapathy and Mudit Painuly, analysts at Macquarie Group, wrote in a report dated yesterday. Lenders may face pressure on net interest margins in the “immediate term,” the report said.

ICICI Bank, the country’s second-biggest lender, lost 3.9 percent to 1,106.75 rupees, extending yesterday’s 2.6 percent drop. HDFC Bank Ltd., the third-largest, fell 1.6 percent to 2,345 rupees. Axis Bank Ltd. dropped 5.2 percent to 1,311 rupees, heading for its steepest decline since July 2009.

“There is a selloff in banks and some investors are booking profits,” Globe’s Mital said. Lenders make up four of the 10 best performing stocks on the Sensex.

Stock purchases by foreign fund managers declined 0.1 percent in the week ended Nov. 26, the first drop since May.

Overseas investors purchased a net 5.42 billion rupees ($120.2 million) of Indian shares on Dec. 3, taking this year’s record inflows to 1.324 trillion rupees, according to data on the website of the Securities and Exchange Board of India.

To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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