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Indian Stocks Retreat After Biggest Weekly Rally in 2 1/2 Years

Dec. 5 (Bloomberg) -- Indian stocks fell amid speculation the biggest weekly advance in shares in more than two years was excessive as inflation and high borrowing costs continue to threaten corporate profits.

Tata Steel Ltd., the nation’s largest producer, lost 1.9 percent after jumping 12 percent last week. ITC Ltd., the biggest cigarette maker, fell for the first time in six days.

The BSE India Sensitive Index, or Sensex, dropped 0.3 percent, to 16,805.33 at the 3:30 p.m. close in Mumbai. The S&P CNX Nifty Index on the National Stock Exchange of India Ltd. lost 0.2 percent to 5,039.15. The BSE 200 Index declined 0.1 percent. The markets are closed tomorrow for a public holiday.

“The strong momentum we saw was symptomatic of a relief rally and I doubt whether there is underlying strength for the market to follow this through,” Vineet Bhatnagar, managing director of MF Global Sify Securities India Pvt., said in an interview with Bloomberg UTV today. “The market will find it difficult to break 5,100” level on the Nifty index, he said.

The Sensex had its steepest weekly rally since July 2009 last week on expectation the nation’s central bank may pause its record series of interest-rate increases after the economy grew at the slowest pace in two years. The gauge has still sunk 18 percent this year as a weak rupee, accelerating inflation, record borrowing costs and Europe’s debt crisis erode profits. Valuation of the companies on the Sensex has narrowed to 14.4 times future profits, near the lowest level since May 2009. The MSCI Emerging Markets Index is valued at 10.3 times.

Sensex Outlook

India’s economy grew 6.9 percent in the September quarter, the least since 2009, as demand cooled after the central bank raised borrowing costs 13 times since mid-March 2010 to limit inflation that’s exceeded 9 percent from December.

Economic expansion may slow to 6.8 percent in the year to March 2013, Bank of America Corp. analysts led by Jyotivardhan Jaipuria wrote in a report today. The Sensex may “correct” to 14,500 over the next six months, according to the report.

The stock index may rebound through February and start to drop in March next year as growth slows, Marc Faber, publisher of the Gloom, Boom & Doom report, told Bloomberg UTV today. The Sensex may drop to 12,000 to 14,000, a level where he would be interested to enter the Indian market, Faber said.

Sterlite Industries (India) Ltd., the biggest copper and zinc producer, lost 1.4 percent to 107.9 rupees. Tata Steel shed 1.9 percent to 411.15 rupees.

ITC slid 1.1 percent to 204.15 rupees, snapping a five-day 7.4 percent rally. ICICI Bank Ltd., the second-biggest lender, fell 1 percent to 779.55 rupees.

‘Hammered’

Pantaloon Retail India Ltd., the largest retailer, led a slump in department-store stocks amid concern Prime Minister Manmohan Singh will reverse last month’s decision to allow foreign companies to take majority stakes in supermarkets.

“They are getting hammered as the government is likely to withdraw or defer the proposal,” said R.K. Gupta, managing director of Taurus Asset Management Ltd., which manages $1.1 billion. “This policy inertia may have a negative impact as foreign investors will lose confidence in the government.”

Opposition parties and some of Singh’s allies are opposed to opening up the $396 billion retail market to companies including Wal-Mart Stores Inc. and Carrefour SA, saying such a move would ruin local mom-and-pop stores. Foreign investment will create as many as 10 million jobs and curb inflation, Trade Minister Anand Sharma, said Nov. 25.

Pantaloon sank 13 percent to 186.35, its biggest plunge since May 2002. Trent Ltd. decreased 3.3 percent to 962.5 rupees. Vishal Retail Ltd. plunged 6 percent to 18.9 rupees. Koutons Retail India Ltd. sank 6.2 percent to 19.55 rupees.

Overseas investors bought a net 9.05 billion rupees ($176 million) of Indian stocks on Dec. 1, paring their withdrawals from equities this year to 17.7 billion rupees, according to data from the Securities & Exchange Board of India. Foreign funds have cut their equity holdings by $2.6 billion from a record in July, the data show.

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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