Indian stocks dropped the most since July after erroneous orders caused a brief plunge in the S&P CNX Nifty Index last week and amid concern the recent rally has made equity valuations expensive.
Reliance Industries Ltd., owner of the world’s largest refining complex, tumbled 4.5 percent, the most since February, after Morgan Stanley downgraded the stock. Trading in the Nifty and some stocks halted for 15 minutes on Oct. 5 after the gauge sank 16 percent in eight seconds. Indian exchanges asked the market regulator to narrow the range it allows some stocks to trade, according to three officials familiar with the proposal. Aluminum maker Hindalco Industries Ltd. slumped 3.6 percent after Citigroup Inc. cut its rating on the stock.
The BSE India Sensitive Index, or Sensex, slid 1.2 percent to 18,708.98 at the close, the most since July 26. The gauge was the worst performer today among Asian equities, which fell ahead of a meeting by European finance ministers aimed at easing the region’s debt crisis.
“The mood is extremely cautious among investors given Friday’s freak crash and high valuations,” Kishor Ostwal, managing director of equities research provider CNI Research (India) Ltd., said by phone from Mumbai. “Technical indicators like the RSI showed the markets are overbought and may lead to some profit booking. The undertone is still bullish given the reforms announcements by the government.”
Indian equities had their biggest monthly advance since January last month amid a burst of policy announcements aimed at reviving an economy growing at near its slowest pace in three years. Prime Minister Manmohan Singh cut fuel subsidies, opened retailing and airlines to foreigners and reduced a tax on local companies’ overseas borrowings to 5 percent from 20 percent. Singh’s wave of policy making following almost two years of legislative paralysis comes as he bids to revive the economy, and restore public support for an administration mired in allegations of corruption and incompetence.
The MSCI Asia Pacific Excluding Japan Index lost 1.1 percent. European finance ministers meet in Luxembourg today to discuss Spain’s overhaul effort and closer banking cooperation. German Chancellor Angela Merkel will visit Greece tomorrow for the first time since the sovereign-debt crisis erupted. The European Union is India’s largest trading partner, according to data from the South Asian nation’s trade ministry.
The Sensex has surged 21 percent this year as foreigners have bought a net $16.5 billion of local stocks, the most among 10 Asian markets tracked by Bloomberg, excluding China. The gauge rallied 7.7 percent in September, taking its valuation to 15.1 times estimated earnings on Oct. 4, the highest level in six months, and boosting the 14-day relative strength index to 75.9. Some investors see readings above 70 as a signal to sell.
“India’s not cheap,” Hugh Young, who helps manage about $80 billion of Asian equities as managing director at Aberdeen Asset Management Asia in Singapore, said in a Oct. 2 interview. “Our concern about India isn’t the quality of companies, which is as good as you’d find anywhere else, but the price.”
Finance Minister Palaniappan Chidambaram told reporters in Mumbai Oct. 6 that the government will probe last week’s stock slump. As many as 59 erroneous trades by a dealer at Emkay Global Financial Services Ltd. in Mumbai that led to trades valued at 6.5 billion rupees ($124 million) caused the drop, the National Stock Exchange of India said on Oct. 5.
The incident, which briefly erased $58 billion in value, is the latest in a series of mishaps that have put pressure on regulators globally to probe electronic trading. In May 2010, high-frequency orders worsened the U.S.’s flash crash, which briefly erased $862 billion in value. The Nasdaq was this May overwhelmed by canceled orders and trade confirmations were delayed in the public debut of Facebook Inc.
Emkay, which isn’t a Sensex or Nifty constituent, tumbled by the daily 10-percent limit today for a second straight day, falling to 27.95 rupees, the lowest close since Sept. 18.
The Nifty index retreated 1.2 percent to 5,676 while its October futures traded at 5,697.75. The BSE-200 Index slid 1.1 percent to 2,305.05. The National Stock Exchange and the BSE Ltd. traded 1.3 billion shares on Oct. 5, compared with a 12-month daily average of 902 million shares.
Indian exchanges have asked the market regulator to narrow the range it allows some stocks to trade, according to three officials familiar with the proposal. Price limits for 216 of the biggest and most liquid stocks should be lowered from 20 percent to 9 percent, the three officials said. The measure was proposed to the Sebi at a meeting in Mumbai on Oct. 6, said the people, who asked not to be named as the talks were private.
Reliance sank 4.5 percent to 819.40 rupees, the most since Feb. 27. The stock was cut to underweight from equal-weight at Morgan Stanley and the price target was lowered to 703 rupees a share. Hindalco slumped 3.6 percent to 120.50 rupees, the most since July 23. Citigroup downgraded the stock to sell from buy and cut its price target to 118 rupees per share, according to a note dated Oct. 5.
Power-equipment maker Bharat Heavy Electricals Ltd. lost 3.6 percent to 254.35 rupees and Tata Power Co., the nation’s biggest private generator, retreated 2.6 percent to 101.30 rupees in a fifth straight day of losses.