Indian equities tumbled the most in two weeks after the Reserve Bank of India raised two interest rates yesterday to steady the rupee after its drop to a record. Stocks most tied to economic growth led the declines.
The S&P BSE Sensex slid 0.9 percent to 19,851.23 at the close in Mumbai, halting three days of gains. ICICI Bank Ltd. plunged the most since February 2011, leading its peers lower. The S&P BSE Bankex, a measure of 13 lenders, sank 4.8 percent, the most since July 2009. Carmaker Maruti Suzuki India Ltd. fell 2.4 percent, a record 11th day of losses.
The Reserve Bank of India increased the marginal standing facility and the bank rate to 10.25 percent from 8.25 percent, and said it will conduct open-market sales of government bonds of $2 billion on July 18. The rupee fell to a record on July 8, hurt by the slowest economic growth in a decade and a record current-account gap. The RBI kept interest rates unchanged in June, citing risks to inflation from a weak rupee.
“Softening of interest rates will get deferred by a few months, which may throw a spanner in the works,” said Gajendra Nagpal, chief executive officer at New Delhi-based Unicon Financial Intermediaries Ltd. “In the short term, the growth targets may have to be lowered.”
Morgan Stanley cut its year-end Sensex target 6.9 percent to 21,500, saying the RBI’s decision raises risks to economic expansion, cost of money and damps local liquidity.
The Bank of New York Mellon India ADR Index fell 1.5 percent, the most in three weeks, to 1,005.49 as of 11:50 a.m. in New York. American depositary receipts of Wipro Ltd. slipped 0.3 percent to $7.94. Infosys Ltd. ADRs added 0.4 percent to $46.46 as Tata Motors Ltd. fell 0.9 percent to $24.26, leaving the ADRs at a 2 percent discount to the underlying shares.
ICICI Bank, the nation’s second-biggest lender by market value, tumbled 5.4 percent to 1,003.45 rupees, the most since Feb. 24, 2011. State Bank of India Ltd., the largest by assets, lost 4.4 percent to 1,827.65 rupees, the lowest close since Jan. 16. HDFC Bank Ltd., the biggest lender by value, dropped 2.4 percent to 678.7 rupees.
Mortgage lender Housing Development Finance Corp. slumped 3.8 percent to 816.05 rupees. The S&P BSE Bankex plunged the most among the 13 sector indexes compiled by the BSE Ltd.
Some company loans may turn bad faster than expected after the RBI’s moves, hurting banks with high loan-deposit ratios, Credit Suisse Group AG analysts led by Ashish Gupta wrote in a report today. IndusInd Bank Ltd. and Yes Bank Ltd., which are not part of the Sensex, will be the worst affected, they wrote.
“Lenders will now have to raise deposit rates or borrow funds from money markets at higher rates,” Vishal Narnolia, a Mumbai-based banking analyst with SMC Global Securities Ltd., said by telephone. “The higher cost of funds cannot be fully passed on, as lending growth is already at a three-year low.”
Credit Suisse cut IndusInd Bank’s share-price estimate 11 percent to 416 rupees. The stock plunged 7.9 percent to 466.40 rupees, the sharpest fall since July 2009.
Maruti Suzuki retreated 2.4 percent to 1,411.25 rupees, a three-month low. Hero MotoCorp Ltd., the biggest two-wheeler maker, lost 1.9 percent to 1,692.35 rupees. Mahindra & Mahindra Ltd. slid 1.6 percent to 913.5 rupees. High interest rates can reduce automobile sales in a country where almost 80 percent of vehicle purchases are funded through loans.
The rupee gained 1 percent to 59.315 per dollar at the 5 p.m. close. The currency, which touched a record low of 61.2125 on July 8 after the U.S. signaled it may reduce stimulus this year, climbed as high as 59.1250, the highest level since July 1. The yield on 8.15 percent bonds due June 2022 soared 52 basis points to 8.2 percent, the most since January 2009.
RBI Governor Duvvuri Subbarao kept the repurchase rate, the policy benchmark, at 7.25 percent in June, ending a run of three cuts. Yesterday’s steps “should not be read as a prelude to any policy rate changes,” Finance Minister Palaniappan Chidambaram told reporters in Jaipur today. “These measures in no way affect our commitment to growth. Measures are taken to quell excessive speculation and reduce volatility and stabilize the rupee.” The policy next review is on July 30.
Cigarette maker ITC surged 2.1 percent to 360.05 rupees, an all-time high. Shares of Hindustan Unilever Ltd. and Sun Pharmaceuticals Industries Ltd. increased to 623.1 rupees and 1,119.5 rupees, both records. Tata Consultancy Services Ltd. climbed 0.5 percent to 1,649.35 rupees, a life-time high.
“Markets are seeing value in companies that are cash-rich and have low debt on their books as they will be least impacted by the tightening measures,” Unicon’s Nagpal said.
ITC had a total debt of 1.02 billion rupees, Sun Pharma 1.98 billion rupees, Tata Consultancy 3.32 billion rupees and Hindustan Unilever 247.4 million rupees as of March 31, data compiled by Bloomberg show. That compares with a median 195 billion rupees for the 30 Sensex companies, the data show.
The Sensex has gained 2.2 percent this year and trades at 13.3 times projected 12-month earnings. That compares with the MSCI Emerging Markets Index’s 10 times.
Global investors sold $29.5 million of domestic shares on July 15, paring this year’s inflows to $12.4 billion, data from the market regulator show. They sold $1.8 billion in June, the most since August 2011, the data show.
The CNX Nifty Index on the National Stock Exchange of India lost 1.3 percent to 5,955.25.