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Indian Stocks Drop for Second Day on Monetary Tightening Concern

Bombay Stock Exchange
Pedestrians walk down a street with electric cables hanging overhead as the Bombay Stock Exchange stands in the background, left, in Mumbai. Photographer: Dhiraj Singh/Bloomberg

Indian stocks declined, with the benchmark index posting its biggest two-day loss in a month, on concern the central bank may take more steps to quell inflation after unexpectedly increased borrowing costs last week.

State Bank of India plunged 5.3 percent, sending the S&P BSE Bankex to its biggest retreat in three weeks. Engineering company Larsen & Toubro Ltd. slumped 4.1 percent, completing its biggest two-day drop in four months. Property developer DLF Ltd. plunged 6.5 percent, the worst performer on the 13-member measure of property developers. The rupee slid for a second day.

The Sensex fell 1.8 percent to 19,900.96, with volumes 37 percent less than the 30-day average at the close. The measure dropped 1.9 percent on Sept. 20 after the Reserve Bank of India raised its main rate for the first time in two years. Nomura Holdings Inc. said that day the central bank will boost funding costs further to curb consumer-price gains that have averaged 10 percent this year. .

“There’s speculation of an increase in the repurchase rate before the next policy meeting” in October, U.R. Bhat, the Mumbai-based managing director of Dalton Capital Advisors India Pvt., said by phone today. “Banks declined on concern their non-performing loans will climb if interest rates move higher from here. Property companies with unsold inventories, too, will bear the brunt of higher borrowing costs.”

State Bank plunged to 1,654.65 rupees, the most since May 23. State-run Bank of India and Bank of Baroda tumbled at least 7 percent, the top losers on the MSCI Emerging Markets Index today. Yes Bank Ltd. plunged 8.2 percent, taking its two-day decline to 16 percent. Housing Development Finance Corp. lost 4.2 percent, the lowest price since Sept. 6.

‘Under Pressure’

Bad loans at lenders climbed to 3.9 percent of total lending as of June 30, the highest level in at least six years, from 2.4 percent in March 2011, according to an Aug. 22 report from the RBI. State-run banks account for a “disproportionate share” of the surge in soured debt, according to the report.

“Banks relying on wholesale funds will find the going rough and their margins will come under pressure,” Dipen Sheth, head of institutional research at HDFC Securities Ltd., said on Bloomberg TV India. “Given the trajectory of interest rates that is now suggested, things will remain tight.”

Larsen & Toubro fell to 812 rupees. DLF slumped to 141.65 rupees, pacing declines in the S&P BSE India Realty Index. The two-day, 11 percent loss in the gauge is the most since January 2010, data compiled by Bloomberg show.

Raghuram Rajan, who took charge of the RBI on Sept. 4, increased the benchmark rate by a quarter point to 7.5 percent amid the weakest economic growth since 2009. All 36 analysts in a Bloomberg survey forecast no change. The move, which came two days after the U.S. Federal Reserve decided to keep stimulus, will arm Rajan against the inevitable paring of the bond-buying program, said Vikas Babu, a trader at Andhra Bank in Mumbai.

Fed Purchases

Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said the Fed may make a small cut to bond purchases in October after its narrow decision this week to refrain from reducing its $85 billion in monthly asset purchases.

Overseas investors bought a net $215 million of domestic shares on Sept. 20, data from the regulator show. That took this year’s net inflow to $13.4 billion, the second-highest among 10 Asian markets tracked by Bloomberg. Concerns the Fed would scale back stimulus prompted foreigners to pull $3.7 billion from Indian equities in the three months ended August, sending the Sensex to an 11-month low on Aug. 21.

The Sensex has risen 2.4 percent this year in rupee terms and is valued at 13.8 times projected 12-month earnings, data compiled by Bloomberg show. It has lost 8.9 percent this year in dollar terms. The MSCI Emerging Markets Index trades at 10.7 times, the data show.

The CNX Nifty Index on the National Stock Exchange of India lost 2 percent to 5,889.75. India VIX, which gauges the cost of protection against losses in the Nifty, increased 9.3 percent.

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