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India’s Sensex Ends Best Run in Five Years Amid Policy Co

Indian stocks fell for the first time in 10 days before a meet today by Prime Minister Manmohan Singh’s biggest ally to decide whether to exit the government over last week’s decisions to allow more foreign investments.

The BSE India Sensitive Index, or Sensex, fell 0.3 percent to 18,496.01 at the close. The gauge rallied 7 percent in the nine days through yesterday, the best run since Oct. 3, 2007. Reliance Industries Ltd., owner of the world’s largest refining complex, fell for the first time in five days. ICICI Bank Ltd., the third-biggest lender by value, slid the most in two weeks.

India’s government increased on Sept. 13 diesel prices for the first time since July 2011 to pare its fiscal deficit, and followed it up by throwing open retail and aviation industries to foreigners, the biggest policy push in Singh’s second term. Trinamool Congress, the second-largest party in the alliance, vowed on Sept. 14 to take a “drastic step” if the decisions aren’t overturned by today.

Investors need to see “how the government handles its allies, how it handles a belligerent opposition and what are the capital market supportive moves that it will announce in the next couple of weeks,” Abhay Laijawala, head of India research at Deutsche Bank AG, told Bloomberg TV India today. “They need to be cognizant of various roadblocks that could come on the way and they will have to meander those.”

The market is closed tomorrow for a public holiday.

Singh’s efforts to implement policies to revive investment amid threats from Standard & Poor’s and Fitch Ratings to lower India’s rating have been derailed by opposition from members of his own coalition.

Withdraw Ministers

If Trinamool Congress were to withdraw, the ruling coalition would be dependent on unpredictable regional parties to get legislation passed. Trinamool could limit its protests to pulling its six ministers, one of whom sits in the cabinet, from the government. The retail proposal stalled in December amid opposition from Trinamool Congress, which governs the eastern state of West Bengal.

Amid the political gridlock, Asia’s third-largest economy expanded 5.5 percent in the June quarter, near the slowest in three years. Growth could slow to 5 percent annually if the logjam persists, Singh told the Planning Commission on Sept. 15.

Last week’s announcements “represent a big political gamble and it remains to be seen whether they will all be implemented given significant opposition within and outside the governing coalition,” Robert Prior-Wandesforde, an analyst at Credit Suisse AG, wrote in a note today. “Assuming they are, the reforms will significantly reduce the chance of an imminent sovereign debt downgrade to junk, as well as increasing the chances of Reserve Bank of India action.”

Reserve Ratios

The Reserve Bank, which yesterday unexpectedly lowered the cash reserve ratio for lenders, predicts expansion will hold at a nine-year low of 6.5 percent in the year through March 2013 as investment slows and Europe’s debt crisis weighs on global growth. Forecasters including Goldman Sachs Group Inc. and Citigroup Inc. expect a pace of less than 6 percent.

The central bank held borrowing costs at 8 percent at its review meeting yesterday, and cut the cash reserve ratio to 4.5 percent from 4.75 percent, adding about 170 billion rupees ($3 billion) to the banking system.

ICICI Bank fell 1.1 percent to 1,049.05 rupees, its first decline in six days. Reliance Industries dropped 2.1 percent to 855.6 rupees. State Bank of India jumped 3.4 percent to 2,149.5 rupees, the highest close since July 19, after Chairman Pratip Chaudhuri said it would review borrowing costs. Infosys Ltd. increased 1.4 percent to 2,600.8 rupees.

‘Bet on Change’

Offshore funds have plowed a net $13.8 billion into Indian shares this year, the most among the 10 Asian markets outside China tracked by Bloomberg, on speculation the government will revive plans to boost an economy growing at the slowest pace in three years. They funds bought a net $429 million of equities yesterday, taking their investments since Sept. 14 to $951 million, data from the regulator show.

“If foreign investors have put $13 billion dollars they have in a sense taken the macro into account,” Samir Arora, founder of Singapore-based hedge fund Helios Capital Management Pte., which focuses its investments on India, told Bloomberg TV India today. “They have either bet on changes in fundamentals or feel the fundamentals are bad but the market prices reflect that or relative to the world, they are okay.”

The Sensex has risen 20 percent this year, the second-best performance among indexes this year with at least a $1 trillion value. The measure trades at 14.6 times estimated earnings, compared with the MSCI Emerging Markets Index’s 11.3 times.

The S&P CNX Nifty Index dropped 0.2 percent to 5,600.05 and its September futures settled at 5,612.40. The India VIX, which gauges the cost of protection against declines in the Nifty, rose 0.3 percent to 17.83.

The National Stock Exchange of India Ltd. and the BSE Ltd. traded 1.3 billion shares on Sept. 17, 47 percent more than the 12-month daily average of 882 million.

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