Indian stocks dropped to the lowest in more than 14 months, led by banks and software services companies, after two U.S. Federal Reserve officials said they opposed a pledge to keep interest rates low, and on speculation the central bank will boost rates further to cool inflation.
Infosys Ltd., the nation’s second-largest software services provider, led a decline among peers after the sector was downgraded to “deteriorating” by BNP Paribas SA. ICICI Bank Ltd., the country’s second-biggest lender, plunged the most in six months. The nation’s food inflation slowed, an easing that may be insufficient to prevent the central bank raising interest rates further.
The Bombay Stock Exchange Sensitive Index, or Sensex, lost 371.01 points, or 2.2 percent, to 16,469.79 in Mumbai, the lowest close since May 26, 2010. The gauge has dropped 22 percent from a Nov. 5 peak, exceeding the 20 percent level marking a so-called bear market for some investors. The S&P CNX Nifty Index dropped 2.2 percent to 4,944.15 and its August futures traded at 4,937.5. The BSE 200 Index decreased 2.3 percent to 2,038.45.
“There’s some sense of panic that has been emerging over the last few days driven by the global environment and some of the domestic events, both political and economic,” said Navneet Munot, who oversees $10.5 billion as chief investment officer at SBI Funds Management Pvt., a unit of India’s biggest lender. “Locally, there has been concern of about inflation not coming off despite global commodities prices cooling off.”
Philadelphia Fed President Charles Plosser and Dallas Fed chief Richard Fisher disagreed with last week’s decision to hold the U.S. benchmark interest rate at a record low until at least mid-2013, the most opposition to a Fed move in almost 19 years. Both said the policy won’t help spur growth. The Reserve Bank of India may raise rates for a 12th time since March 2010 at its next meeting, sacrificing growth to rein in inflation that has stayed at more than 9 percent for eight straight months.
Bankex, a Bombay Stock Exchange index measuring 14 lenders, fell 3.5 percent to 10,971.66, the lowest level since July 2010. The gauge has declined 5.7 percent in the past three trading sessions. India’s benchmark wholesale-price inflation in July rose 9.22 percent from a year earlier, the government said Aug. 16, faster than economists’ estimates for a 9.2 percent gain.
The Sensex has dropped 2.2 percent in the past three days. The MSCI Emerging Market Banks Index, a measure of 97 developing-markets lenders, rallied 4.6 percent in the five days through Aug. 17.
ICICI Bank slumped 5.1 percent to 863.8 rupees, its fifth day of losses. State Bank of India, the biggest lender, lost 4.2 percent to 2,078.4 rupees, the lowest close since April 2010. Axis Bank Ltd., the fourth-largest lender by market value, tumbled 5.2 percent to 1,109.25 rupees, the lowest since March 2010.
Indian stocks also fell after Morgan Stanley cut its year-end target for the Sensex by 15 percent to 18,850. The brokerage also reduced its forecast for India’s 2012 gross domestic product growth to 7.4 percent from 7.8 percent and its estimate for the fiscal year ending March 31, 2013, to 7.6 percent from 8 percent.
“We believe a combination of factors -- including persistently high inflation, higher cost of capital, cut in the ratio of fiscal spending to GDP, a weak global capital markets environment and slow pace of investment -- will cause a further slowdown in growth,” analysts Chetan Ahya and Upasana Chachra wrote in the report today.
Infosys declined 3.9 percent to 2,354.1 rupees, while larger rival Tata Consultancy Services Ltd. fell 3.8 percent to 962.35 rupees. Wipro Ltd., the third-biggest software services provider, slid 4.7 percent to 328.15 rupees. India’s top software exporters get 80 percent of their sales from overseas.
The three companies were cut to “reduce” from “buy” by Abhiram Eleswarapu, an analyst at BNP Paribas. The stocks “are yet to reflect a likely prolonged anemic macro growth scenario and the 50 percent chance of a U.S. recession that our economics team forecasts,” the analyst wrote in a note to clients today. “We are yet to see material consensus downgrades since the macro data started worsening.”
Tata Motors Ltd., the biggest truckmaker and owner of Jaguar Land Rover, slid 3.4 percent to 752.05 rupees, the lowest close since July 2010. The maker of world’s cheapest car, the Nano, declined 2.8 percent yesterday after saying global sales last month declined 6 percent. The shares have lost 42 percent this year, the worst-performing auto stock on the Sensex.
Reserve Bank Governor Duvvuri Subbarao has to weigh the risks to expansion posed by Europe’s debt crisis and a faltering U.S. recovery against tightening monetary policy to slow the fastest price gains among the BRICS nations of Brazil, Russia, India, China and South Africa.
An index measuring wholesale prices of farm products including rice and wheat rose 9.03 percent from a year earlier in the week ended Aug. 6, the commerce ministry said today. It increased 9.9 percent the previous week.
Indian households expect inflation to accelerate in the 12 months through June “mainly because of the movements in food price,” the central bank said last week.
India’s Prime Minister Manmohan Singh said Aug. 15 that taming inflation would be his government’s “top-most” priority and vowed to eradicate corruption that threatens to undermine the nation’s development.
The Reserve Bank of India has raised its repurchase rate 11 times since the start of 2010 and last increased it by 50 basis points on July 26 to 8 percent to damp rising living costs.
Earnings for 46 percent of Sensex companies in the three months ended June lagged behind analyst estimates, according to Bloomberg data. That compares with 33 percent that missed forecasts in the previous quarter.
The Sensex has lost 20 percent this year, the worst performer after Brazil’s Bovespa Index, on concern higher borrowing costs will slow economic growth and erode company profits. Companies on the Sensex are valued at 13.8 times estimated earnings, compared with a multiple of 10 for the MSCI Emerging Markets Index.
Foreign investors sold $1.3 billion of Indian equities this month as higher borrowing costs weighed on companies’ net income and the government curbed its decision-making amid corruption scandals.
Indian anti-corruption campaigner Anna Hazare is on an indefinite fast to demand tougher laws to prosecute corrupt officials. The latest standoff between Hazare and the government -- fueled by social media websites, 24-hour TV coverage and widespread public anger over official malpractice -- deepens the damage to Singh’s administration, which has been embroiled in graft charges since October.
His legislative agenda has stalled amid the allegations, the biggest of which involves the 2008 sale of permits to run mobile-phone services that the country’s auditor says may have cost the exchequer $31 billion.
“The market is worried that the government would be too busy in managing the crisis at hand rather than getting into policy initiatives,” said Gajendra Nagpal, chief executive officer at New Delhi-based Unicon Financial Intermediaries Pvt.
Overseas funds sold a net 2.1 billion rupees of Indian equities on Aug. 16, paring their investment in stocks this year to 42.6 billion rupees, according to data on the website of the Securities and Exchange Board of India.