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Indian Stocks Drop as Deficit May Curb RBI Policy-Easing

Indian stocks fell amid concern a wider-than-estimated budget deficit may curb the central bank’s scope to cut rates and after Federal Reserve Chairman Ben S. Bernanke failed to signal more stimulus measures.

Oil & Natural Gas Corp., the nation’s largest state-owned oil explorer, fell for the second day this week after investors bid for fewer shares than on offer at a government auction. Reliance Industries Ltd., which has the highest weighting on the benchmark index, slid for the first time in three days. DLF Ltd., the biggest developer, sank 5.5 percent after Veritas Investment Research Corp. advised investors to “sell” and cut the stock’s price estimate by more than half.

The BSE India Sensitive Index, or Sensex, lost 1 percent to 17,583.97 at the 3:30 p.m. close in Mumbai. The gauge added 3.3 percent in February, posting two straight monthly gains for the first time since September 2010, as foreigners poured a net $7.4 billion into local stocks amid optimism slowing inflation will prompt the central bank to cut interest rates.

“This is definitely not a time to be chasing as a lot of stocks have had a good run,” Gaurav Doshi, a portfolio manager at Morgan Stanley India Financial Services, told Bloomberg UTV today. “The market has been caught off guard in the last 1 1/2 months on the back of liquidity. This is the time to reconsider sectoral reallocations.”

India’s fiscal deficit exceeded the full-year target in the 10 months through January. It may surge to 6.1 percent of gross domestic product this fiscal year, according to Nomura Holdings Inc. and Kotak Mahindra Bank Ltd., more than Finance Minister Pranab Mukherjee’s aim of 4.6 percent. India’s central bank had signaled that efforts to curb the gap would boost its scope to lower interest rates as growth slows. It reviews rates on March 15, a day before Mukherjee presents the budget.

‘Interest Rate Tailwinds’

Still, Credit Suisse Group AG predicts the Reserve Bank of India will lower rates by 175 basis points by January 2013. The central bank in January reduced lenders’ reserve ratios for the first time since 2009 after raising rates seven times last year.

“The interest rate headwinds of 2011 are now going to be interest rate tailwinds,” said John Praveen, chief investment strategist at Prudential International Investments Advisers, a unit of Prudential Financial Inc., which manages $900 billion in assets, in a Bloomberg UTV interview. “It provides a more favorable backdrop for foreign investors to go into the market. The potential for further foreign fund flows is there.”

The S&P CNX Nifty Index on the National Stock Exchange of India Ltd. slid 0.8 percent to 5,339.75. The BSE 200 Index lost 0.7 percent to 2,175.08. U.S. stocks pared gains after Bernanke yesterday affirmed that interest rates are likely to remain low at least through late 2014 without offering any indication that further monetary easing is under consideration.

Lenders Rally

ICICI Bank Ltd., the country’s second-biggest lender, fell 2.5 percent to 883.5 rupees, paring this year’s gain to 29 percent. State Bank of India, the biggest lender, declined 1.3 percent to 2,218.75 rupees.

Oil & Natural Gas declined 1.7 percent to 288.2 rupees.

Reliance Industries, owner of the world’s largest refining complex, lost 1.2 percent to 810.95 rupees. Larsen & Toubro Ltd., the largest engineering company, dropped 2.3 percent to 1,277.9 rupees. Mahindra & Mahindra Ltd., the largest maker of sport-utility vehicles, sank 4 percent to 681.75 rupees. DLF slid 5.5 percent to 214.05 rupees, its lowest since Jan. 30.

The Sensex has advanced 14 percent this year, rebounding from a 25 percent slump in 2011, as offshore funds poured $7.4 billion into stocks. The measure trades at 15.5 times future profits, down from 19 times at the end of 2010.

“The rally has gone from extreme undervaluation to maybe close to a fair valuation,” Prudential’s Praveen said. “There’s still an upside from current levels but not at the same pace.”

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