Indian Stocks Climb to Two-Week High on Reforms, Easing Optimism

India’s benchmark stock index rose to the highest level in two weeks amid optimism the government will take more measures to boost growth.

The BSE India Sensitive Index, or Sensex, advanced 0.5 percent to 19,476, the highest close since Dec. 6. Tata Motors Ltd., owner of Jaguar and Land Rover, and Sterlite Industries (India) Ltd. led carmakers and materials producers higher. SREI Infrastructure Finance Ltd. and Edelweiss Financial Services Ltd., which are not part of the Sensex, rallied, leading gains among non-banking finance companies.

Lawmakers approved changes in the nation’s banking laws yesterday, raising a cap on voting rights and giving more power to the central bank in a move that may attract investment to the industry. Reserve Bank Governor Duvvuri Subbarao signaled higher odds of a reduction in interest costs, lifting investor confidence even after he held the benchmark rate yesterday for a fifth policy meeting. Goldman Sachs Group Inc. today said it sees “high likelihood” of a 50 basis points cut in January.

“It appears the RBI will finally start to cut rates,” said Mahesh Patil, co-chief investment officer at Birla Sun Life Asset Management Co., India’s fourth-biggest mutual fund with $13.3 billion in assets. Patil said he expects the RBI to cut rates by up to 75 basis points in 2013. The money manager is buying so-called rate-sensitives such as automakers and lenders, and exiting utilities and consumer staples, he said.

Policy Response

Subbarao yesterday kept the repurchase rate at 8 percent and held the banks’ reserve ratio at 4.25 percent, withstanding calls from Finance Minister Palaniappan Chidambaram for lower rates to revive an economy forecast by the government on Dec. 17 to expand at the slowest pace in a decade this fiscal year. Still, with inflation cooling, monetary policy has to “respond to the threats to growth,” the authority said yesterday. The RBI’s next policy review is on Jan. 29.

Tata Motors, which also makes the world’s cheapest car, the Nano, surged 3.2 percent to 307.75 rupees, a seven-month high. Maruti Suzuki India Ltd., the biggest carmarker, rallied 2.3 percent to 1,509.75 rupees. Motorcycle maker Bajaj Auto Ltd. also added 2.3 percent to 2,143.05 rupees.

Sterlite added 1.4 percent to 119.9 rupees. Hindalco Industries Ltd., an aluminum producer, climbed 1.7 percent to 129.65 rupees. Tata Steel Ltd., the biggest producer of the alloy, gained 2.4 percent to 424.1 rupees.

Banking Laws

The additional regulatory powers approved yesterday take the central bank a step closer to issuing new bank licenses, part of a process that has been under way for more than two years. The amended law will allow the RBI to take control of a bank and inspect the books of lenders’ associate enterprises. The rules for new permits will be issued after the central bank has received the new powers, Subbarao said last month.

SREI Infrastructure Finance increased 2.4 percent to 46.35 rupees. Edelweiss rose 2.1 percent to 36 rupees. LIC Housing Finance Ltd. added 1.6 percent to 287.55 rupees.

Prime Minister Manmohan Singh’s administration began a campaign in mid-September to revive economic growth from the weakest levels since 2009 and avoid a credit-rating downgrade by paring fuel subsidies and opening up retailing and aviation to foreign investment. The passing of the banking bill is the latest in the series of such steps.

“The government has woken up and taken decisive steps on foreign direct investment in retail, banking and infrastructure sectors, which has boosted sentiment,” Birla’s Patil said.

The Sensex has risen 26 percent this year, headed for its biggest annual jump since 2009, as government steps to open the economy to offshore investment lured foreign funds. Overseas funds were net buyers of domestic stocks for a 23rd day on Dec. 17, taking net purchases in 2012 to $22.5 billion, the highest among 10 Asian markets tracked by Bloomberg, excluding China, data compiled by Bloomberg show.

The Sensex is valued at 15.4 times estimated earnings, compared with the MSCI Emerging Markets Index’s 12.1 times, data compiled by Bloomberg show. Volumes in the gauge exceeded the 30-day average by 34 percent today.

The S&P CNX Nifty Index on the National Stock Exchange of India added 0.6 percent to 5,929.60. India VIX, which gauges the cost of protection against losses in the Nifty, gained 0.2 percent to 14.47, data compiled by Bloomberg show.

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