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Indian Stocks Drop as RBI Says Scope for Further Easing Limited

May 3 (Bloomberg) -- Indian stocks fell from a three-month high, paring a weekly gain, as the central bank said there’s “little space” for further monetary easing after cutting interest rates for a third straight policy meeting.

The S&P BSE Sensex index lost 0.8 percent to 19,575.64 at the close in Mumbai. The gauge climbed 1.5 percent this week, a third weekly advance, the longest stretch since December. State Bank of India, the nation’s biggest lender, paced declines among its peers. Tata Motors Ltd., India’s largest truckmaker and owner of Jaguar Land Rover, tumbled 4 percent.

Reserve Bank of India Governor Duvvuri Subbarao lowered the repurchase rate to 7.25 percent from 7.5 percent today, as predicted by 33 of 40 economists in a Bloomberg survey. The decision extends the only reduction of borrowing costs among major emerging nations this year. The Sensex surged 1.2 percent yesterday on speculation the bank could announce a larger-than-estimated cut.

“The market had rallied significantly before the policy, so there’s a reason for it to correct; it’s not a sell-off,” Hemant Kanawala, head of equities at Kotak Mahindra Old Mutual Life Insurance Ltd., which has $2 billion in assets, said by phone from Mumbai today. Kanawala said he expects the rate to be lowered further by as much as 75 basis points, or three-quarters of a percentage point, in the fiscal year ending March 2014.

Slowing Expansion

Subbarao stepped up efforts to spur investment and consumption after the weakest economic expansion in a decade led to the slowest rise in wholesale prices in 40 months in March. A record current-account deficit and consumer-price inflation above 10 percent are among risks constraining room for further policy easing, the central bank said today.

Gross domestic product may expand 5.7 percent in the fiscal year through March 2014, compared with the baseline projection of 5.5 percent for the previous 12 months, the central bank said. Wholesale inflation will probably be “range-bound” at around 5.5 percent in 2013-2014, it said.

The European Central Bank cut borrowing costs to a record-low 0.5 percent yesterday to fight the euro-region’s recession. The U.S. Federal Reserve said this week it will keep buying bonds at a monthly pace of $85 billion, as Chairman Ben S. Bernanke presses on with his effort to boost employment.

‘Easing Mode’

“Globally, central banks are in monetary easing mode and the system is flush with liquidity and that will keep the inflows coming and support our markets,” Manish Sonthalia, who manages $233 million in equities at Motilal Oswal Asset Management Co. in Mumbai, said by phone today. “The RBI’s comment that there’s ‘little space’ for monetary easing doesn’t mean there’s no space. We expect inflation to trend down and that may prompt the RBI to cut rates in the next review.”

Foreign funds bought a net $183 million of local shares on April 30, taking their net investment in equities this year to $11.3 billion, a record for the period, according to data compiled by Bloomberg.

State Bank tumbled 3.7 percent to 2,213.8 rupees, its biggest loss since March 20. ICICI Bank Ltd., the country’s second-biggest lender, retreated 3.6 percent to 1,129.95 rupees. Tata Motors plunged 4 percent to 285.6 rupees.

The Sensex has rebounded 7.4 percent since reaching a seven-month low on April 9. The gauge has climbed 0.8 percent in 2013 and trades at 13.2 times projected 12-month profits, compared with the MSCI Emerging Markets Index’s 10.4 times.

The 50-stock CNX Nifty Index fell 0.9 percent to 5,944, while its May futures settled at 5,951.10. India VIX, which measures the cost of protection against losses in the Nifty, dropped 4.5 percent to 15.55.

To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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