Indian stocks dropped the most in three weeks after the ruling alliance’s largest ally withdrew support and the central bank said there’s limited room for further monetary easing. Bonds and the rupee declined.
The S&P BSE Sensex fell 1.5 percent to 19,008.1 at the close in Mumbai, the sharpest decline since Feb. 28. The rupee weakened 0.4 percent to 54.3750 per dollar and the yield on 8.15 percent notes due June 2022 rose 2 basis points to 7.92 percent. India VIX, the benchmark measure for options prices, rose to the highest level in three weeks.
Prime Minister Manmohan Singh’s government would be 44 seats short of a majority in parliament without the Dravida Munnetra Kazhagam, leaving it even more reliant on the support of fickle regional parties to pass legislation such as bills to boost foreign investment in pensions and insurance. The Reserve Bank of India cut the repurchase rate to 7.5 percent from 7.75 percent and said the scope for further reductions is limited.
“It will be difficult for the government to push reforms as smaller parties will play hard ball,” said A.K. Prabhakar, senior vice president of equity research at Mumbai-based Anand Rathi Financial Services Ltd. “Investors are worried the withdrawal will make the government ineffectual.”
The DMK, with 18 lawmakers in the 545-member lower house of parliament, withdrew support over the government’s approach to alleged war crimes in Sri Lanka. The Tamil Nadu state-based party has signaled a patch-up is possible if its demands are met. The government is stable and there is no crisis, Finance Minister Palaniappan Chidambaram said in New Delhi.
State Bank of India, the nation’s biggest lender, slid 2.1 percent to 2,203.55 rupees. Oil & Natural Gas Corp. (ONGC), India’s largest explorer, fell 2.5 percent to 309.85 rupees. Reliance Industries Ltd. (RIL), owner of the world’s largest refining complex, lost 1.1 percent to 825 rupees. Bharat Heavy Electricals Ltd. (BHEL), the biggest power-equipment maker, sank 5.1 percent to 185.8 rupees, the lowest close since July 2006.
The central bank cut interest rates for the second time this year to bolster the weakest economic growth in a decade. The repurchase rate was pared to 7.5 percent from 7.75 percent. Thirty of 35 analysts in a Bloomberg survey predicted the move and the rest forecast no change. A quarter-point rate cut on Jan. 29 was the first since April last year.
Foreign funds have purchased a net $9.8 billion of Indian stocks this year, a record for the period, according to data compiled by Bloomberg, amid government efforts to reform the economy by paring subsidies, allowing higher foreign direct investment and speeding up infrastructure projects. Overseas funds bought a net $24.5 billion of shares last year, the most among 10 Asian markets tracked by Bloomberg, helping the Sensex (SENSEX) to its biggest annual advance in three years.
The stock gauge has declined 2.2 percent this year, the third worst-performing benchmark index among Asian nations after Malaysia and Hong Kong. The measure is valued at 12.9 times projected 12-month profits, the lowest reading in four months, data compiled by Bloomberg show. The MSCI Emerging Markets Index trades at 10.5 times.
“Political developments could cause knee-jerk reactions but once the dust settles focus will shift back to valuations and the growth attractiveness of the market,” Rajesh Cheruvu, chief investment officer at RBS Private Banking India, said by e-mail today. “Valuation attractiveness would continue to lure portfolio flows and support Indian equities.”
The 50-stock CNX Nifty Index retreated 1.5 percent to 5,745.95 and its March futures settled at 5,751.90.
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