India Stocks Fall Most in 3 Weeks as Govt Ally to Exit Co

Trinamool Congress Party Leader Mamata Banerjee
Mamata Banerjee, Trinamool Congress party leader and chief minister of West Bengal. Photographer: Pankaj Nangia/Bloomberg

Indian stocks declined the most in three weeks, tracking losses in Asian equities, after Prime Minister Manmohan Singh’s largest ally said it was exiting the coalition over reforms announced last week.

The BSE India Sensitive Index, or Sensex, fell 0.8 percent to 18,349.25 at the close, its steepest decline since Aug. 29. Reliance Industries Ltd., owner of the world’s largest refining complex, retreated to a one-week low. ICICI Bank Ltd., the third-biggest lender by value, dropped the most in two weeks.

Singh unveiled last week the biggest policy overhaul of his second term by ending a 14-month freeze in diesel prices to lower the government’s fiscal deficit and allowing more foreign investment in aviation and retail sectors. The moves pushed up the Sensex to a 14-month high on Sept. 17. Trinamool Congress ministers will be pulled from the federal cabinet on Sept. 21, party leader Mamata Banerjee said Sept. 18, allowing a few days that could be a window for compromise.

“There is a bit of political instability and there is always a worry this government may not be able to complete its full term,” Nirmal Jain, chairman of Mumbai-based brokerage IIFL Ltd., told Bloomberg TV India today. “The markets have turned cautious and will consolidate at current levels.”

The MSCI Emerging Markets Index slid 1.1 percent, the most since July 23, as the Shanghai Composite Index declined to the lowest since February 2009. Futures on the Standard & Poor’s 500 Index slid 0.3 percent as euro-area services and factory output declined to a 39-month low in September, and China’s manufacturing probably contracted for an 11th month, according to data from Markit Economics and HSBC Holdings Plc.

‘Unwarranted Euphoria’

Reliance dropped 2.7 percent to 832.50 rupees, the lowest close since Sept. 13, amid a change in recommendation by Kotak Institutional Equities to “sell” from “reduce.” The broker advised selling into the “unwarranted euphoria” that’s pushed up the stock 10 percent this month. ICICI Bank fell 2.5 percent to 1,022.55 rupees, the sharpest drop since Sept. 5.

Pantaloon Retail India Ltd., the nation’s top supermarket operator, fell 2.9 percent to 174.6 rupees. Budget carrier SpiceJet Ltd. decreased 3.4 percent to 36.8 rupees.

Losing the backing of Trinamool puts the government about 24 seats short of a majority in the lower house of Parliament, though Singh’s administration has in the past won expressions of support from other groups in the legislature. The proposal to allow foreign investment in retailers stalled in December amid opposition from Trinamool.

‘Brink of Defeat’

Standard & Poor’s and Fitch Ratings have threatened to lower the nation’s credit rating as the government struggled to implement policies to revive investment. The economy grew 5.5 percent in the June quarter, near the slowest pace in three years. Growth could ease to 5 percent annually if the policy paralysis persists, Singh said on Sept. 15.

“We’re going to see the investment cycle become very difficult because of this particular development,” Raamdeo Agrawal, joint managing director at Motilal Oswal Financial Services Ltd. in Mumbai, told Bloomberg TV India today. “The government is almost on the brink of getting defeated.”

Last week’s announcements drove foreign funds to invest a net $951 million on Sept. 14 and 17, the biggest two-day net purchases of Indian equities in almost nine months. They bought a net $201.1 million of shares on Sept. 18, the ninth straight day of purchase, data from the market regulator show.

The market was closed yesterday for a public holiday.

The Sensex has climbed 19 percent this year after offshore investors bought a net $14 billion of stocks, the most among 10 Asian markets tracked by Bloomberg outside China. The 30-stock measure trades at 14.5 times estimated profit, more than the MSCI Emerging Markets Index’s 11.2 multiple, according to data compiled by Bloomberg. The Indian gauge’s valuation is still below its 2012 high of 16.2 reached in February.

Citigroup Inc. raised its June 2013 target for the Sensex by 8 percent to 19,900 on prospects of increased foreign flows, and Deutsche Bank AG increased its year-end forecast for the gauge by 11 percent to 20,000, the brokerages said in notes to clients on Sept. 17.

The S&P CNX Nifty Index fell 0.8 percent to 5,554.25 and its September futures settled at 5,560.50. The BSE-200 Index dropped 0.7 percent. The National Stock Exchange of India Ltd. and the BSE Ltd. traded 1.2 billion shares on Sept. 18, 33 percent more than the 12-month daily average of 883 million.

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