Sensex Drops as Poll Losses Threaten Economic Reform; Bharat Heavy Slides

Indian stocks fell for the third day as concern election losses for the ruling party may slow the pace of policy changes countered optimism the central bank may take steps to ease a cash crunch next week.

Jindal Steel & Power Ltd. (JSP), the largest producer by value, slid for the third day. Maruti Suzuki India Ltd. (MSIL), the biggest carmaker, fell to a one-week low. Sterlite Industries (India) Ltd. (STLT), the largest copper producer, tumbled 4.2 percent. The BSE India Sensitive Index (SENSEX) lost 0.2 percent to 17,145.52 at close in Mumbai. The gauge changed directions 10 times.

Prime Minister Manmohan Singh’s Congress Party failed to gain ground in Uttar Pradesh, India’s most-populous state, and won’t play a role in forming its next administration. The party was also behind in Punjab. Eight of nine economists surveyed by Bloomberg predict the central bank to cut cash reserve ratio by 50 basis point on March 15, a day before the federal budget is presented, and start paring interest rates in April.

“The dilemma for the government after the state election verdict is whether to present a populist budget or one that is reforms oriented and that uncertainty is keeping markets range bound,” Sandeep Singal, co-head of institutional equities at Emkay Global Financial Services Ltd., said from Mumbai. “We expect a 50-basis point cut in the cash reserve ratio, though a cut in interest rates is unlikely.”

The Reserve Bank of India reduced on Jan. 24 the amount of deposits banks need to set aside as reserves for the first time since 2009, and signaled it may cut interest rates if inflation continues to slow. Government data showed on Feb. 14 consumer prices eased to the slowest in more than two years in January.

Cash Shortage

Lenders borrowed an average 1.35 trillion rupees ($26.6 billion) a day from the central bank in March, more than double the 600 billion-rupee limit favored by the monetary authority, as companies withdrew funds to pay tax, reducing the amount of cash in the banking system, according to central bank data.

Positive state-poll results would have improved support for Singh, whose government is facing corruption charges and has failed to boost economic growth. Among Singh’s plans are opening the retail industry to companies such as Wal-Mart Stores Inc. (WMT), an initiative halted in December amid protests over likely job losses. The Supreme Court last month scrapped 122 cell-phone permits, whose sale in 2008 sparked India’s biggest corruption probe, and Singh failed to win passage in December of an anti- corruption bill.

Pantaloon Retail India Ltd. (PF), the largest retailer, slumped 3.3 percent to 155.25 rupees, taking its three-day loss to 16 percent. Shoppers Stop Ltd. tumbled 3.7 percent to 324.85.

Jindal Steel fell 1.8 percent to 536.8 rupees. Maruti slid 1.7 percent to 1,308.55 rupees. Sterlite tumbled 4.2 percent to 109.1 rupees, extending its four-day decline to 12 percent.

Fund Flows

The S&P CNX Nifty Index on the National Stock Exchange of India decreased less than 0.1 percent to 5,220.45. The BSE 200 Index (BSE200) retreated 0.1 percent to 2,123.76. The market is closed tomorrow for a public holiday.

The Sensex has risen 11 percent this year as foreign funds bought $7.4 billion of equities amid optimism the RBI will ease its monetary policy, even as company profit-growth slowed and the outlook for economic growth dimmed. The measure trades at 15.1 times future earnings, compared with 19.4 times at the end of 2010. The MSCI Emerging Markets (EEM) Index trades at 10.6 times.

The state poll results may trigger government efforts to consolidate fiscal deficit, raise growth through development before general elections in 2014, Morgan Stanley analysts led by Ridham Desai wrote in a report.

“The immediate consensus reaction is that these results will trigger a wave of populism from the Congress government at the center. That would be a hasty conclusion given the nation’s fiscal balance and that general elections another 24 months away,” the analysts wrote.

The 50-stock Nifty (NIFTY) index may be reaching end of slide that started at 5,600, according to the report.

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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