Indian Stocks Extend Decline as Coalition Rift Threatens Reforms

India’s benchmark stock index had the longest losing run in more than five weeks amid concern the withdrawal of the government’s biggest partner from the ruling alliance may jeopardize economic reforms.

The S&P BSE Sensex (SENSEX) dropped for the fourth day, losing 0.7 percent to 18,884.19 at close in Mumbai, the longest stretch of losses since Feb. 11. Volumes were 24 percent higher than the 30-day average. ICICI Bank Ltd. (ICICIBC), India’s third-largest lender by value, fell to a six-month low. Oil & Natural Gas Corp., the nation’s biggest explorer, retreated to a two-month low.

The former largest ally of Prime Minister Manmohan Singh ruled out a patch-up after it quit the coalition over policy toward war crimes in Sri Lanka. Dravida Munnetra Kazhagam’s exit has left Singh 44 seats short of the halfway mark in the lower house of parliament and more reliant on regional parties outside the alliance to win the passage of legislation.

“The market believes the reforms agenda will temporarily be put on the back burner and the government’s focus will possibly return to self-preservation,” Manishi Raychaudhuri, head of Indian equity research at BNP Paribas Securities (Asia) Ltd., told Bloomberg TV India today.

ICICI Bank sank 3 percent to 1,001.55 rupees, the lowest close since Sept. 13. HDFC Bank Ltd. (HDFCB), India’s largest lender by value, slid 1 percent to 625.5 rupees. State Bank of India, the biggest by assets, lost 3.8 percent to 2,120.4 rupees. The S&P BSE Bankex (BANKEX) lost 2.1 percent to close below its 200-day average for the first time since Sept. 5.

‘Greater Scrutiny’

ICICI Bank, HDFC Bank and Axis Bank Ltd. were involved in money laundering, news website Cobrapost reported last week. ICICI Bank on March 16 suspended 18 staff members and HDFC Bank hired Deloitte Touche Tohmatsu India to probe the report. The Reserve Bank of India is collecting information on the report, Deputy Governor Urjit Patel said March 14.

“There’s concern greater Reserve Bank scrutiny on private banks will lead to more restrictions on lending,” A.K. Prabhakar, senior vice president of equity research at Anand Rathi Financial Services Ltd. in Mumbai, said by e-mail.

Oil & Natural Gas (ONGC) Corp., the nation’s biggest explorer, retreated 2.9 percent to 300.8 rupees, the lowest since Jan. 11. Mahindra & Mahindra Ltd. (MM) fell 0.6 percent to 873.4 rupees. Utility NTPC Ltd. (NTPC) dropped 3.4 percent to 139.35 rupees, the lowest close since November 2008.

Singh is battling to refocus the government ahead of an election next year, ending two years of criticism over alleged corruption and a slowing economy. India’s economy will grow at 5 percent this fiscal year, the slowest in a decade. Bills to boost foreign investment in pensions and insurance are among those the government wants to pass.

Monetary Easing

The Sensex also fell yesterday after the Reserve Bank of India pared the benchmark repurchase rate to 7.5 percent from 7.75 percent and said inflation and the current-account deficit limit the scope for further monetary easing. The government is trying to contain the budget shortfall to damp price pressures.

The stock gauge has retreated 2.8 percent this year, the worst-performing benchmark index in Asia after Malaysia. The gauge trades at 12.8 times projected 12-month profits, compared with the MSCI Emerging Markets Index’s 10.5 times.

Overseas funds bought a net $27 million of local stocks on March 19, data from the regulator show. Foreign investors have purchased a net $9.81 billion of local equities this year, a record for the period, data compiled by Bloomberg show.

The 50-stock CNX Nifty (NIFTY) Index retreated 0.9 percent to 5,694.40 and its March futures settled at 5,724. The India VIX, the benchmark measure for options prices, fell 0.3 percent.

To contact the reporter on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net

To contact the editor responsible for this story: Allen Wan at awan3@bloomberg.net