Sensex is World’s Worst Perfomer as Interest Rate Increase Tops Forecasts

Indian stocks dropped the most among major indexes in the world after rate increases by the nation’s central bank exceeded economists’ estimates. The nation’s stocks listed in the U.S. also declined more than its BRIC peers.

Reserve Bank of India today raised rates by 0.5 percentage point, more than analysts’ forecast, and predicted inflation to remain at about 9 percent until September because of higher oil costs. An index tracking American depositary receipts of Indian companies by Bank of New York Mellon fell 2.8 percent to a six- week low as of 4 p.m. close in New York, exceeding losses of 2.1 percent for China’s ADRs, 1.3 percent for Russia and 2.1 percent for Brazil.

Mahindra & Mahindra Ltd. (MM), the largest maker of tractors, fell the most in three months. Jaiprakash Associates Ltd. (JPA), a builder of dams, roads and bridges, sank 8.2 percent. The ADRs of ICICI Bank Ltd. (IBN), India’s second-biggest lender, fell 4.4 percent, the biggest in four months, trailed by a 3.7 percent decline in U.S.-listed shares of HDFC Bank Ltd. (HDFCB), the country’s third-largest.

“The central bank is reacting to the alarming situation of inflation,” said Manish Sonthalia, who manages $300 million in stocks for wealthy individuals at Motilal Oswal Securities Ltd. in Mumbai. “I was expecting a 75 basis point increase by the end of the year, but there’s been front-loading of rate tightening.” Sonthalia is avoiding companies that require large amounts of capital as borrowing costs are set to rise.

Sensex

The Bombay Stock Exchange Sensitive Index, or Sensex, lost 463.33, or 2.4 percent, to 18,534.69 at the close in Mumbai. The gauge fell for the seventh day, its longest run of losses since November 2008, to close at the lowest level since March 24. The S&P CNX Nifty Index on the National Stock Exchange slid 2.4 percent to 5,565.25. Its May futures settled at 5,562.25. The BSE 200 Index lost 2.3 percent to 2,292.08.

The Reserve Bank increased the repurchase rate to 7.25 percent from 6.75 percent. Only seven of 25 economists in a Bloomberg survey had predicted the move, while the remaining expected a quarter-point gain. The central bank boosted the reverse repurchase rate to 6.25 percent from 5.75 percent.

State Bank of India (SBIN), the nation’s biggest, plunged 4.1 percent to 2,583.7 rupees. The Bombay Stock Exchange’s Bankex Index of 14 lenders fell for a seventh day, losing 3.1 percent, the longest run of losses since November 2008.

Higher Reserves

The central bank asked lenders to set aside more funds to cover bad loans and double provisions for restructured debt as it sought to curtail risks tied to defaults by borrowers. The monetary authority capped investments by banks into so-called liquid plans by mutual funds that invest in debt instruments to reduce the risk of sudden large outflows during an economic slowdown.

Mirae Asset Global Investments (India) Pvt., which managed 3.8 billion rupees ($86 million) in assets as of March, has cut holdings in state-run banks, said Gopal Agrawal, the company’s chief investment officer in Mumbai. The rate increase “really shows the RBI’s concern on inflation and they’ve taken a bold step,” he said. “The mood of the market will be decided more by the corporate earnings and the global outlook.”

Inflation in India is the highest after Russia among the so-called BRICs economies and if left unchecked could rekindle public protests and undermine Prime Minister Manmohan Singh’s government. Rising borrowing costs will slow economic growth this year and help ease inflation to 6 percent “with an upward bias” by March 31, 2012, Governor Duvvuri Subbarao said today.

The Bank of New York Mellon BRIC Select ADR Index fell 2.1 percent today, after gaining 2 percent this year through yesterday. The measure tracks all the ADRs from Brazil, Russia, India and China.

No Baby-Step Approach

“The Reserve Bank has tried to move ahead of inflation; the baby-step approach has been sacrificed in light of rising inflationary expectations,” said Aneesh Srivastava, who oversees about $355 million as chief investment officer at IDBI Federal Life Insurance Co. Srivastava, based in Mumbai, said he would avoid developers and use the drop to buy consumer shares.

Mahindra & Mahindra plunged 4.5 percent to 708.1 rupees. Tata Motors Ltd. (TTMT), the biggest truckmaker and owner of Jaguar Land Rover, sank 5.1 percent to 1,163.1 rupees and its May futures traded at 1,163.20 rupees. Its ADRs slid 3.9 percent in New York to $26.20 each, the lowest in more than a month.

Automakers, Developers

Bajaj Auto Ltd. (BJAUT), the second-largest motorcycle maker, slid 5.1 percent to 1,367.15 rupees. Larsen & Toubro Ltd. (LT), the largest engineering company, declined 4.2 percent to 1,537.4 rupees, its steepest drop since Feb. 24.

DLF Ltd. (DLFU), the biggest developer, slid 2.5 percent to 220.75 rupees. Jaiprakash Associates sank 8.2 percent to 84.9 rupees. The company was cut to “neutral” from “buy” at Goldman Sachs Group Inc., which cited the “limited areas of potential positive surprise” given the concerns over the company’s debt levels.

The Bombay Stock Exchange Realty Index fell 2.9 percent to 2,140.90, its lowest level since March 23.

Rising interest costs and inflation are prompting Indian billionaire Uday Kotak’s money management unit to trim holdings in the nation’s consumer-goods stocks and add shares of lenders and pharmaceutical companies.

“We are getting a sense that consumer discretionary spending may see some kind of a slowdown in the next six to eight months,” Pankaj Tibrewal, a fund manager at Kotak Mahindra Asset Management Co., which has 322 billion rupees ($7.3 billion) in assets, said in an interview yesterday.

Price-Earnings Ratios

The Sensex has declined 9.6 percent this year on concern faster inflation will cause borrowing costs to rise, crimping growth in corporate earnings. Sensex stocks trade at an average 14.7 times estimated profit, down from 21.5 times in March 2010. The MSCI Emerging Markets Index is valued at 11.5 times.

“A rising interest rate scenario is not conducive for stock investors in near term,” IDBI Federal’s Srivastava said. “Growth and company earnings will be impacted.”

Overseas investors sold a net 1.95 billion rupees ($43.9 million) of Indian stocks on April 29, paring their investments in equities this year to 45.2 billion 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 Belinda Cao in New York at Lcao4@bloomberg.net

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

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