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India Stocks Drop With Rupee as Portugal Debt Snaps Budget Rally

Indian Finance Minister Arun Jaitley
Arun Jaitley, India's finance minister. Photographer: Prakash Singh/AFP/Getty Images

India’s stocks sank to a two-week low, bonds fell and the rupee weakened as renewed concern about Europe’s banking system overshadowed Finance Minister Arun Jaitley’s plan to achieve the lowest budget deficit since 2008.

The S&P BSE Sensex dropped 0.3 percent to close at 25,372.75, erasing gains of as much as 1.9 percent in the last hour of trade amid concern over missed debt payments by a company linked to Portugal’s second-largest bank. The yield on India’s benchmark 10-year notes rose four basis points to 8.77 percent, after dropping as much as nine basis points. The rupee sank 0.7 percent to 60.2050 per dollar.

Jaitley unexpectedly refrained from increasing the last government’s budget-deficit target of 4.1 percent as he delivered his first budget speech today. The median of 15 forecasts in a Bloomberg survey was for the goal to be revised to 4.5 percent. The finance minister also eased rules on foreign investment in the defense and insurance sectors, and pledged to build more highways, airports and ports.

“The fall in the last hour was a ruboff effect of what happened in Europe with a Portuguese bank,” Manish Sonthalia, who manages $280 million as head of equities at the portfolio management services division of Motilal Oswal Asset Management Co. in Mumbai, said by phone. “The budget has lot of measures that will boost spending. We expect the market to go up.”

Prime Minister Narendra Modi’s two-month-old government faces pressure to bolster economic growth from near a decade low and rein in the budget deficit after winning the biggest election victory in 30 years.

Deficit Targets

Jaitley called for revenues as a percentage of the economy to increase as he mapped out a plan to pare the fiscal deficit to 3 percent of the economy by 2017. He cited rising oil costs and a weak monsoon as key risks for the target.

“The most interesting thing that’s been put in place are explicit targets on the fiscal deficit,” Adrian Lim, a Singapore-based money manager at Aberdeen Asset Management Plc, which oversees $322 billion worldwide, said in an interview on Bloomberg TV India today. “It’s a pretty strong commitment by this government.”

State Bank of India slid 1.4 percent to a six-week low, sending a gauge of lenders to its biggest four-day loss since Jan. 30. Hero MotoCorp Ltd., the nation’s biggest two-wheeler maker, tumbled 3.9 percent, the most in a month and the worst performance on the Sensex.

Tata Power Co., India’s biggest generator outside state control, increased 2.9 percent after Jaitley said he plans to extend the 10-year tax break for new power plants. DLF Ltd. surged the most in six weeks on a proposal to give incentives to real-estate investment trusts.

FDI Boost

India will raise the cap on automatic approval for foreign direct investment in the defense sector to 49 percent, from 26 percent, Jaitley said. The limit in insurance will also be increased to 49 percent, he said.

The bond market was briefly whipsawed during Jaitley’s speech after he said the 2015 budget deficit target would be 4.5 percent of GDP. The government’s 10-year notes pared gains at that time before recouping the loss. The 4.1 percent figure appears in a budget document on the government’s web site.

India’s stocks, bonds and currencies sank in late trading as concern Europe’s debt problems will resurface curbed demand for riskier assets.

“The correction in the market in the last leg of the trading session was more on account of global news flow about a possible default by a big Portuguese bank and nothing to do with budget announcements,” said Arvind Sethi, chief executive of Tata Asset Management Ltd. “While on paper the target of 4.1 percent looks good, we believe that the government may overshoot it toward 4.5 percent.”

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