Indian Stocks Drop Most in 7 Months on Inflation Outlook, Europe

Indian (SENSEX) stocks tumbled the most in seven months after a proposed increase in freight costs in the railway budget raised concerns about inflation and as Italy’s inconclusive election revived European debt concerns.

The S&P BSE Sensex index slid 1.6 percent, the most since July 23, to 19,015.14 at the close. Nine out of the 30 stocks on the measure declined more than 3 percent. Tata Motors Ltd. (TTMT), the owner of Jaguar Land Rover, slid the most in three weeks. Reliance Industries Ltd. (RIL), the operator of the world’s largest refining complex, lost 3.6 percent, erasing the year’s advance.

Freight costs will be linked to fuel prices starting April 1, a move that may lead lead to an average 5 percent increase in rates, Rail Minister Pawan Kumar Bansal said in parliament. While the measure helps the government limit subsidies, higher shipping costs would add to price pressures and dim prospects of the central bank easing monetary policy, said Anand Tandon, chief executive officer of brokerage JRG Securities Ltd.

“Likelihood of interest-rate cuts this year is becoming more and more remote if inflation continues to persist,” he told Bloomberg TV India in an interview. Higher transportation costs “affect the entire system,” he said.

After the first interest-rate reduction in nine months in January, Reserve Bank of India Governor Duvvuri Subbarao said on Feb. 16 inflation risks will limit the extent he can further pare rates to bolster an economy growing at the weakest pace in a decade. Funding costs in India are among the highest in Asia.

Autos Weaken

Tata Motors, the best performing stock on the Sensex last year, plunged 3.3 percent to 289.4 rupees. Maruti Suzuki India Ltd. (MSIL), the country’s biggest carmaker, declined 2.8 percent to 1,404.3 rupees, the lowest close since Oct. 30. Mahindra & Mahindra Ltd. (MM), India’s largest maker of sport-utility vehicles and tractors, decreased 3.3 percent to 865.75 rupees.

Reliance Industries tumbled 3.6 percent to 823.5 rupees, the most since Oct. 8. Larsen & Toubro Ltd. (LT), India’s largest engineering company, retreated 2.6 percent to 1,365.7 rupees. Mortgage lender Housing Development Finance Corp. (HDFC) slumped 3.8 percent to 771.55 rupees and ICICI Bank Ltd. (ICICIBC), the country’s second-biggest lender, lost 2.7 percent to 1,064 rupees.

Shares of companies that cater to the railways plunged. Kalindee Rail Nirman (Engineers) Ltd. sank 11 percent to 70.4 rupees, the most in 15 months. Texmaco Rail & Engineering Ltd. (TXMRE) lost a record 11 percent to 54.8 rupees, while Titagarh Wagons Ltd. fell 8.3 percent to 244.3 rupees, almost a four-year low.

“There was no major announcement in the rail budget that improved the outlook on the companies’ order books,” said Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd. at Kochi in southern India.

‘Shaken, Stirred’

The Stoxx Europe 600 Index and the MSCI Emerging Markets Index lost at least 1 percent at 6:22 p.m. Mumbai time after early results suggested Italy’s election would yield a hung parliament, leading to another vote. The European Union is India’s top trading partner, according to the commerce ministry.

“Italy elections have shown Europe is still coughing and the short term is further shaken and stirred by the potential U.S. spending cuts kicking in on March 1,” Shankar Char, vice president at ICICI Securities Ltd. in Mumbai, said by phone. “Add to this, we have the budget coinciding with the expiry of the February derivatives series.”

Finance Minister Palaniappan Chidambaram will present the budget on Feb. 28 that may deepen spending cuts to ease price pressures amid wider efforts to revive investment. Derivative contracts in India expire on the last Thursday of every month.

Overseas funds bought a net $49 million of local shares on Feb. 25, data from the regulator show. Foreigners bought a net $8.3 billion this year, a record for the period, according to data compiled by Bloomberg.

Earnings Scorecard

They purchased a net $24.5 billion in 2012, helping the Sensex to its biggest annual gain in three years. The measure has fallen 5.4 percent from a two-year high reached on Jan. 25 as profits at 43 percent of the 30 Sensex firms lagged behind estimates in the December quarter, compared with 40 percent in the previous two quarters, data compiled by Bloomberg show. Net outflows from domestic mutual funds for eight straight months through January contributed to the decline in the gauge, data from the industry trade body show.

The Sensex trades at 13.4 times projected 12-month profits, compared with the MSCI Emerging Markets Index’s 10.2 times, data compiled by Bloomberg show. Volumes on the gauge were 14 percent more than the 30-day average at the close.

The CNX Nifty (NIFTY) Index of the National Stock Exchange slid 1.6 percent to 5,761.35. India VIX, which measures the cost of protection against losses in the Nifty, jumped 3.8 percent.

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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