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India Stock Futures Swing Between Gain, Loss on Election

Indian stocks declined the most in five weeks after the ruling Congress failed to win in two key provincial elections, fueling speculation the pace of economic policy changes by Prime Minister Manmohan Singh may slow.

Reliance Industries Ltd., the country’s largest company, dropped to a six-week low. Sterlite Industries (India) Ltd., the biggest copper and zinc maker, sank 5.5 percent, pacing losses among its peers. The BSE India Sensitive Index, or Sensex, slid 1.1 percent to 17,173.29 at the 3:30 p.m. close, erasing an intraday gain of 1.9 percent.

In the Uttar Pradesh state, home to 200 million people, the Samajwadi Party was set to win an outright majority in the 403-member assembly. Congress was ahead in 27 seats, just five more than it won in 2007, and will not play a role in forming the next administration. It was also behind in Punjab state. A win would have secured support for Singh, whose government is facing corruptions charges and has failed to boost growth.

“The expectation was the Congress would support Samajwadi Party to form the government,” Shishir Bajpai, senior vice president at Mumbai-based IIFL Wealth Management Ltd., which has $1.8 billion in stocks under management and advisory, said by phone. If Congress’ support had been required to rule Uttar Pradesh, Singh could have demanded Samajwadi Party backing for the federal government, Bajpai said. “It will be difficult to push certain reforms.”

Among Singh’s plans are the opening of the retail industry to companies such as Wal-Mart Stores Inc., an initiative halted in December amid protests over likely job losses. The Supreme Court last month scrapped 122 mobile-phone permits, whose sale in 2008 sparked India’s biggest corruption probe, and Singh failed to win passage in December of an anti-corruption bill.

‘Unpopular Reforms’

“The results will not provide the political space for the government or confidence to carry through unpopular reforms” such as opening up the retail industry, land acquisition bill, and pension and insurance reforms, Goldman Sachs Group Inc. said in a report today. Still, “the worst case scenario of a splintered mandate in Uttar Pradesh and months of political uncertainty has not materialized.”

A decline in global equities also contributed to the slide in local stocks, IIFL’s Bajpai said. Asian stocks fell, with the MSCI Asia Pacific Index set for its steepest two-day decline this year, as falling U.S. factory orders and slower growth in China crimped the earnings outlook for miners and machinery makers. The Stoxx 600 Europe Index slid 1.4 percent, extending yesterday’s 0.6 percent drop.

Investors will now focus on the credit policy review on March 15 and the federal budget the following day, said Bajpai. “The correction will be deeper if the budget disappoints.”

Cash Squeeze

The Reserve Bank of India cut on Jan. 24 the amount of deposits lenders need to set aside as reserves for the first time since 2009, seeking to ease a cash squeeze, and indicated it may cut interest rates if inflation continues to slow.

The bank raised rates by a record 13 times from March 2010 to October last year to restrain price rises. Government data showed on Feb. 14 that inflation eased to the slowest in more than two years in January. Still, an 8.7 percent jump in oil prices last month fanned concerns persistent inflation and a widening fiscal deficit may curb the RBI’s scope to cut rates.

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, Nomura Holdings Inc. and Kotak Mahindra Bank Ltd. forecast last week, more than Finance Minister Mukherjee’s aim of 4.6 percent.

The S&P CNX Nifty Index on the National Stock Exchange gained 1.1 percent to 5,222.40. The BSE 200 Index lost 1.1 percent to 2,126.64.

Reliance Industries, owner of the world’s largest refining complex, tumbled 2.6 percent to 776.55 rupees. Larsen & Toubro Ltd., the largest engineering company, declined 2.5 percent to 1,235.05 rupees.

Sterlite plunged 5.5 percent to 113.9 rupees and Hindalco Industries Ltd., an aluminum maker, sank 5.8 percent to 131.75 rupees amid the 1.4 percent drop in the London Metal Exchange Index yesterday, the most since Feb. 10.

Overseas investors bought a net $39.5 million of equities yesterday, raising total investments this year to $7.5 billion, according to the market regulator.

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