Indian Stocks Drop Most in Month as RBI Fans Deficit Conc

Indian stocks declined, paring an weekly gain, and the rupee ended a four-day rally on concern the government may miss its budget deficit target.

The BSE India Sensitive Index, or Sensex, fell 0.4 percent to 17,783.21 at the close. The gauge still gained for a fourth straight week. Reliance Industries Ltd., owner of the largest refinery complex, slid to a two-week low. ICICI Bank Ltd, the third-biggest lender by value, slid for a second day this week.

India’s government may miss its budget-deficit target as higher spending on fuel subsidies and a weak economic expansion could lead to a tax shortfall, the Reserve Bank of India said in a report yesterday. Forecasters from Goldman Sachs Group Inc. to Citigroup Inc. cut their growth predictions for India this month while raising inflation estimates and scaling back expectations for interest-rate reductions by the central bank.

“Focusing on reducing the fiscal deficit is one of the key things the government needs to do,” Sampath Reddy, chief investment officer at Bajaj Allianz Life Insurance Co., said in an interview on Bloomberg TV India. “Our interest rates are one of the highest globally. We are probably the only country where rates are higher than what they were in the pre and post Lehman crisis.”

Finance Minister Palaniappan Chidambaram today expressed concerns over the rising deficit at a meeting of the ruling coalition, Bloomberg TV India reported, citing people it did not identify. The gap may reach 6 percent of GDP if subsidies are not capped, he said. That’s higher than the government’s target to pare the deficit to 5.1 percent this year from 5.8 percent in 2011-12 by keeping fuel and fertilizer subsidies at less than 2 percent of GDP.

Growth Outlook

The RBI left borrowing costs unchanged at 8 percent last month to tackle inflation risks as the rupee dropped and the impact of deficient rainfall on crops threaten to stoke prices. While headline inflation eased to a 32-month low last month, it is the fastest among the biggest emerging markets. The economy may grow 6.5 percent in 2012-2013, matching the slowest pace in nine years, the central bank forecast last month.

Prime Minister Manmohan Singh is struggling to revive his economic reform agenda as infighting in the ruling coalition and allegation of graft paralyze policy making. Both houses of parliament were adjourned for a fourth day today after protests by groups led by the Bharatiya Janata Party. The BJP, the main opposition party, has demanded that Singh resign after a report by the chief auditor last week said the government may have lost $33 billion by not auctioning coal blocks.

‘No Loss’

“This presumptive loss is so flawed,” Chidambaram told reporters in New Delhi today. No coal has been mined so far in 56 of the 57 blocks examined by the auditor, he said. “If the coal is not mined, where is the loss.”

The Prime Minister is willing to give a statement on the auditor’s report on Aug. 27 if the BJP allows the parliament to function, Chidambaram said.

“The government will find it hard to push important bills given the opposition onslaught in and outside parliament,” Amar Ambani, head of research at IIFL Ltd., said in an e-mail. “This is not good news as the rally was driven by optimism of material progress on reforms. Foreign inflows may taper off if the government fails to take decisive action.”

The Sensex has increased 15 percent this year, helped by the biggest overseas equity investments among 10 Asian markets tracked by Bloomberg. Foreign funds bought a net $72 million of stocks yesterday, the 18th straight day of purchases, taking their investments in equities this year to $11.6 billion, data from the regulator show.

Rupee Weakens

The rupee declined 0.4 percent to 55.495 per dollar at the close, paring the week’s gain to 0.5 percent. The currency has lost 4.4 percent this year.

Reliance declined 1.6 percent to 782.1 rupees, the lowest price since Aug. 10. ICICI Bank lost 2 percent to 954.35 rupees. Infosys Ltd. slid 1.3 percent to 2,444.8 rupees.

Mahindra & Mahindra Ltd., the world’s biggest producer of tractors by volume, fell 1.2 percent to 761.95 rupees after it reduced its forecast for sales growth of the farm equipment in India as the worst rains in three years delays sowing. Industry sales may expand as little as 2 percent in the year to March, Pawan Goenka, president of the automotive and farm equipment division, said by e-mail yesterday. He had earlier estimated sales to increase as much as 10 percent.

The Sensex trades at 14 times estimated earnings, compared with the MSCI Emerging Markets Index’s valuation of 10.4 times.

India VIX, which measures the cost of protection against losses in the S&P CNX Nifty Index, rose 0.3 percent to 16.16. The Nifty fell 0.5 percent to 5,386.70 and its August futures settled at 5,402.7. The BSE-200 Index declined 0.4 percent. The top two bourses traded 793 million shares on Aug. 23, 12 percent less than the 12-month daily average.

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