India’s stocks slumped the most in Asia after the central bank unexpectedly refrained from cutting interest rates. Bonds and the rupee extended losses after Fitch Ratings lowered its credit outlook to negative.
Benchmark government 10-year notes slid the most in two months after Fitch cited slowing growth and the nation’s budget deficit for its decision that came after the BSE India Sensitive Index closed 1.4 percent lower at 16,705.83 in Mumbai. State Bank of India, the nation’s biggest lender, sank 4.4 percent, erasing an intraday gain of 2.2 percent. Tata Power Co., the largest non-state-owned generator, fell 1.6 percent.
Governor Duvvuri Subbarao left the key repurchase rate at 8 percent, a stance that contrasts with rate cuts in Australia and China in the past two weeks as the impact of Europe’s debt crisis fans through Asia and dominates the agenda of a Group of 20 summit starting in Mexico today. Subbarao’s room to counter the weakest Indian growth in almost a decade is being limited in part by a plunge in the rupee, which has stoked an inflation rate already above 7 percent.
“This is a shocker,” said D.K. Aggarwal, who manages about $100 million of local assets as chairman at SMC Wealth Management Ltd. in New Delhi. “A rate cut was a must because the growth was slowing. The confidence has taken a beating.”
The 30-stock gauge had risen as much as 0.9 percent before the Reserve Bank of India’s announcement.
Only four of 25 economists in a Bloomberg survey predicted the RBI’s decision, with 19 expecting a 0.25 percentage-point cut and the remainder a half-point reduction.
Growth concerns have pushed down the Sensex 9 percent from this year’s high set on Feb. 21. Prime Minister Manmohan Singh is grappling with an economy hobbled by a record trade deficit and a budget shortfall that has exceeded targets, corruption scandals and infighting in the coalition that has stymied his efforts to lure more foreign investment.
Gross domestic product climbed 5.3 percent in the quarter ended March from a year ago, the least since 2003, imperiling the prime minister’s goal of 9 percent annual gains to reduce poverty. Standard & Poor’s has warned it may cut the country’s credit rating to so-called junk status.
“While growth in 2011-2012 has moderated significantly, headline inflation remains above levels consistent with sustainable growth,” the RBI said today.
Inflation accelerated to 7.55 percent in May, the fastest pace in the BRIC group of largest emerging markets that also includes Brazil, Russia and China. The government may miss its projected fiscal deficit of 5.1 percent of GDP in the year through March 2013, the group’s widest, Fitch said today.
“Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy,” Art Woo, a Hong Kong-based director of sovereign ratings at Fitch, said in a statement today.
The yield on the government’s 8.15 percent note due June 2022 climbed 11 basis points, the most for a benchmark 10-year bond since April 20, to 8.17 percent at 5 p.m. in Mumbai, according to the central bank’s trading system.
One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, jumped 25 basis points, or a quarter-percentage point, to 7.82 percent, the highest level this month, data compiled by Bloomberg show.
“Investors were obviously pricing in a rate cut as growth is slowing and the decline in bonds reflects that disappointment,” said Paresh Nayar, head of money-market and currency trading in Mumbai at FirstRand Ltd., a unit of South Africa’s second-largest banking group.
The rupee weakened 0.8 percent to 55.92 against the dollar, the lowest closing level this month.
Fitch affirmed its sovereign rating for India at BBB-, the lowest investment grade. Standard & Poor’s warned on June 11 that it may cut India’s rating after lowering the outlook to negative in April.
India VIX, which measures the cost of protection against losses in the S&P CNX Nifty Index, sank 12 percent to 22.60, the biggest plunge since Oct. 25. The Nifty declined 1.5 percent to 5,064.25, while its June futures settled at 5,058.8. The BSE-200 Index fell 1.5 percent to 2,044.60. Combined trading volume on India’s top two exchanges was 694 million shares on June 15, compared with a 12-month daily average of 908 million.
State Bank plunged 4.4 percent to 2,087.95 rupees. ICICI Bank Ltd., the country’s second-biggest lender, tumbled 3.5 percent to 816.55 rupees. The 14-member BSE India Bankex Index retreated 3.2 percent, erasing an intraday gain of 1.3 percent.
Maruti Suzuki India Ltd., the biggest carmaker, retreated 1.4 percent to 1,091.80 rupees. Larsen & Toubro Ltd., the largest engineering company, decreased 0.3 percent to 1,319.95 rupees. Tata Power sank to 92.15 rupees, while Sterlite Industries (India) Ltd., the largest copper and zinc maker, slumped 4.4 percent to 95.60 rupees.
Overseas investors were net buyers of local shares for a seventh straight day on June 14, purchasing a net $16 million of stocks and taking total investment in 2012 to $8.6 billion, data from the regulator show. They cut holdings by $273 million in May, a second consecutive month of net sales.