India’s Sensex Plunges to Six-Week Low as RBI Holds Interest

India’s benchmark stock retreated to a six-week low after the nation’s central bank refrained from cutting borrowing costs to fight price pressures.

The BSE India Sensitive Index (SENSEX), or Sensex, lost 1.1 percent to 18,430.85 at the close in Mumbai, its lowest level since Sept. 20. The 30-stock gauge erased an intraday gain of 0.4 percent after the policy announcement. State Bank of India, the biggest lender, sank the most since August, leading its peers lower. Tata Motors Ltd. (TTMT), owner of Jaguar Land Rover, slid the most in three months.

India faces inflation of almost 8 percent, limiting the central bank’s scope to join nations from Brazil to Thailand in extending rate cuts. While the Reserve Bank of India resisted Finance Minister Palaniappan Chidambaram’s call for cheaper credit to back the recent policy revamp, the authority said there is a “reasonable likelihood” of further easing in the first quarter of 2013 as inflation cools.

“The market has reacted negatively because a rate cut expectation was built in,” Navneet Munot, who manages $9.6 billion as chief investment officer at SBI Funds Management Pvt. in Mumbai, said in a phone interview. “The RBI would like to see execution of the reforms announced by the government and a little more credibility on the fiscal side. The bigger concern for the RBI is that inflation has been sticky.”

CRR Cut

Governor Duvvuri Subbarao lowered the cash reserve ratio to 4.25 percent from 4.5 percent, injecting 175 billion rupees ($3.2 billion) into the system. The reduction, the fourth this year, was predicted by 19 of 33 analysts in a Bloomberg News survey, while four expected 4 percent and the rest no change.

His decision to keep the key rate unchanged was predicted by 19 of 33 economists in the survey. Borrowing costs have remained unchanged since a 50 basis-points cut in April, the first since 2009.

The central bank increased its inflation estimate to 7.5 percent by March 2013 from 7 percent, adding the pace of price increases may ease in the first quarter of next year. Inflation reached a 10-month high in September after diesel prices rose.

The authority pared its economic growth forecast to 5.8 percent for the year through March 2013, from 6.5 percent, on slowing investment and consumer spending, declining exports and the impact on farming of a weak monsoon season.

‘Three Issues’

“The three issues for the RBI are inflation, inflation and inflation,” said K.R. Bharat, managing director of Advent Advisory Services, in an interview with Bloomberg TV India. The central bank is unlikely to cut borrowing costs “when growth rates are coming down and inflation is rising,” he said.

The central bank resisted calls from finance minister Chidambaram for lower interest rates to boost growth, prompting him to say the government will revive economic expansion by itself if necessary.

Chidambaram called for cheaper credit earlier this month to back a government push to spur growth, and pledged yesterday to set a budget-deficit goal of 5.3 percent of gross domestic product in the 12 months that began April 1, narrowing to a nine-year low of 3 percent by 2017. The government’s current term ends in 2014.

“When the sustainability of the government itself is in question, then any fiscal road map would be taken with a pinch of salt,” Aneesh Srivastava, who oversees $470 million of assets as chief investment officer at IDBI Federal Life Insurance Co. in Mumbai, said by phone today. “The RBI’s hands are tied.”

Prime Minister Manmohan Singh’s administration started a policy revamp on Sept. 13, including fuel-subsidy curbs and a push to spur investment. That snapped months of gridlock over how to bolster growth. The rupee is up 2.6 percent versus the dollar since then, paring its one-year drop to 9.6 percent.

‘Walk Alone’

“Growth is as much a challenge as inflation,” Chidambaram told reporters in New Delhi after the Reserve Bank’s decision. “If government has to walk alone to face the challenge of growth, then we’ll walk alone.”

State Bank of India (SBIN) tumbled 4.3 percent to 2,074.3 rupees, reversing an intraday gain of 1.5 percent. ICICI Bank Ltd. (ICICIBC), the second-biggest lender, lost 2.2 percent to 1,045.15 rupees. Axis Bank Ltd. (AXSB) sank 3 percent to 1,184.7 rupees.

Tata Motors plunged 3.5 percent to 247.65 rupees, the most since July 26, and Hero Motocorp Ltd. (HMCL) decreased 1.7 percent to 1,872.1 rupees, halting a three-day, 6-percent rally.

Maruti Suzuki India Ltd. (MSIL), the biggest carmaker, rallied 2.1 percent to 1,390.8 rupees after reporting profit that beat analyst estimates. Net income at Suzuki Motor Corp.’s Indian unit fell to 2.27 billion rupees ($42 million) in the three months ended Sept. 30, from 2.4 billion rupees a year earlier. That beat the 1.97 billion-rupee median of 38 analysts’ estimates compiled by Bloomberg.

Liquidity Rally

The Sensex has increased 19 percent this year, driven by overseas fund purchases and government policy reforms announced since mid-September to revive the economy. Foreign funds bought a net $18.1 billion of local shares this year, the most among 10 Asian markets tracked by Bloomberg, excluding China.

“Markets are not moving on fundamentals but on the back of liquidity,” Advent’s Bharat said. “Markets will do well in the next two-three months as global liquidity remains good.”

Drugmaker Dr. Reddy’s Laboratories Ltd. increased 1.6 percent to 1,724.3 rupees. The second-biggest drugmaker by value reported a 32 percent increase in second-quarter profit to 4.07 billion rupees, beating estimates.

Earnings have trailed analyst forecasts at only three of the 18 Sensex firms that have posted results for the September quarter, compared with 40 percent in the three months through June, data compiled by Bloomberg show. In comparison, about 59 percent of companies on the MSCI Emerging Markets Index that posted earnings this month have missed analysts’ estimates.

The Sensex is valued at 14.7 times estimated earnings, compared with a multiple of 11.5 times for the MSCI Emerging Markets Index (MXEF), data compiled by Bloomberg show.

The S&P CNX Nifty Index (NIFTY) of 50 companies fell 1.2 percent to 5,597.90 and its November futures settled at 5,628. The BSE-200 Index lost 1.2 percent and the BSE Mid-Cap Index shed 1 percent. The National Stock Exchange of India and the BSE Ltd. traded 741 million shares yesterday, 19 percent less than the 12-month daily average.

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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