(Corrects fund flow figure in eighth paragraph in story published yesterday.)
Indian stocks rebounded from their lowest level in four months as the finance minister delayed a tax avoidance rule by a year after the plan stoked concern that foreign fund flows to the $1.1 trillion market will decline.
Bharat Heavy Electricals Ltd. (BHEL), the biggest power-equipment producer, surged 6 percent, rebounding from a five-year low. Larsen & Toubro Ltd. (LT), the largest engineering company, jumped the most in two months. The BSE India Sensitive Index (SENSEX) rose 0.5 to 16,912.71 at close, erasing an intraday drop of 1.9 percent.
Foreigners were net sellers of Indian shares in April for the first time this year on concern the government’s proposal to introduce the General Anti-Avoidance Rule to curb evasion of taxes by companies through misuse of tax treaties would apply to their holdings of shares. GAAR will be deferred until the fiscal year beginning April 2013, and steps will be taken to ensure the rule is applied objectively, Finance Minister Pranab Mukherjee told lawmakers in New Delhi today.
“Investors now have a timeframe and they can plan ahead, and hopefully after one year there will be an equal playing field for all foreign investors,” Juergen Maier, fund manager at Raiffeisen Capital Management, said from Vienna. The money manager has about $1.1 billion of emerging-market assets.
The rupee had its biggest rally in more than a month on optimism the tax move will boost flows from overseas. The currency rose 1.1 percent to 52.915 a dollar at close, ending four days of losses.
India is grappling with the fastest inflation and widest fiscal deficit among the largest emerging economies, as well as a record trade gap that’s weakened the rupee. Policy reversals, including the suspension of plans to allow overseas retailers to open supermarkets, have clouded the outlook for investment. Standard & Poor’s last month reduced India’s credit outlook to negative, taking the nation a step closer to junk status.
Offshore funds have still poured a net $8.9 billion in local stocks this year, a record for the period, on optimism the Reserve Bank of India will ease monetary policy to revive growth. Asia’s third-biggest economy grew 6.1 percent in the December quarter, the least in almost three years, as costlier credit and inflation hurt consumer spending and investment.
Foreign funds bought a net 5.13 billion rupees ($95.4 million) of local stocks on May 4, a fourth straight day of purchases, according to the data compiled by the nation’s market regulator. They withdrew a net $102.6 million in April.
“At least now we do not have to worry about foreign fund outflows,” Samir Arora, founder of Singapore-based hedge fund Helios Capital Management Pte., said by phone today. “The GAAR clarity will assuage concerns. It was the right thing to do.”
The Reserve Bank of India cuts its repurchase rate for the first time in three years on April 17, and said inflation risks may limit the room for further reductions. Inflation was 6.89 percent in March, the fastest among the BRIC group of emerging markets that also includes Brazil, Russia and China.
India VIX, which measures the cost of protection against losses in the S&P CNX Nifty (NIFTY) Index, plunged 4.3 percent to 20.22, ending a four-day advance. The Nifty climbed 0.5 percent to 5,114.15 and its May futures settled at 5,125.95. The BSE 200 Index (BSE200) added 0.6 percent.
A total of 957 million shares changed hands on the BSE and NSE on May 4, 6 percent more than the daily average in the past 12 months, according to data compiled by Bloomberg.
The Sensex trades at 13.2 times future earnings, compared with the MSCI Emerging Markets Index’s 10.4 times. The 30-stock gauge sank to a four-month low earlier, tracking Asian markets, amid renewed concern on Europe’s debt crisis after French Socialist Francois Hollande was elected President and as U.S. employers added fewer jobs than forecast.
Bharat Heavy soared 6 percent to 226.95 rupees, the most since Feb. 28. Larsen gained 4.9 percent to 1,202.9 rupees.
State Bank of India, the nation’s biggest lender, rose 1.6 percent to 2,028.2 rupees, rebounding from an intraday drop of 6 percent. ICICI Bank Ltd. (ICICIBC) increased 1.8 percent to 848.25 rupees, reversing losses of as much as 4.4 percent.
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