India’s Sensex Rebounds as Inflation Spurs Rate-Cut Speculation

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Indian stocks advanced, led by lenders, as slowing retail inflation spurred speculation the central bank may lower interest rates.

Axis Bank Ltd. was the top gainer on an industry gauge, which had its biggest gain in two months. Mahindra & Mahindra Ltd., the largest tractor maker, climbed the most in a week, while Reliance Industries Ltd., owner of the world’s biggest refining complex, rose for a third time in four days.

The S&P BSE Sensex climbed 1.4 percent to 27,251.10 at the close, rebounding from a 2.3 percent drop on Tuesday. Consumer prices rose 4.87 percent in April from a year ago, from 5.17 percent in March. The slowdown in the inflation rate raises the possibility that central bank Governor Raghuram Rajan will cut rates for a third time this year to boost growth. Indirect tax collection in April surged 46 percent, official data showed.

“The macroeconomic factors are improving and they augur well for the market,” Chokkalingam G., managing director at Mumbai-based Equinomics Research Pvt., said in an interview with Bloomberg TV India on Wednesday. “People will regret if they don’t use this correction” to buy, he said.

The Sensex entered a so-called correction on May 7, with the gauge sliding more than 10 percent from its Jan. 29 record, on concerns about the pace of earnings growth and delays in the passage of key economic bills in parliament.

Rajan kept rates unchanged after a policy review on April 7 as he waits on lenders to pass on the two previous cuts to customers. He said his next move would depend on data showing risks to inflation, which he’s mandated to keep below 6 percent by January.

El Nino Threat

“Low inflation is boosting rate-cut hopes,” Rajendra Wadher, director at PRB Securities Ltd., said by phone on Wednesday. “However, the Reserve Bank of India has limited room for monetary easing amid a weak monsoon forecast.”

HSBC Holdings Plc reduced its rating on Indian stocks to underweight from overweight in a report Tuesday, citing slowing earnings growth expectations, rising commodity prices, the looming El Nino weather phenomenon and diminished returns from interest-rate cuts. Underweight is the equivalent of sell.

A smaller harvest, after bad weather ravaged winter crops, can drive up costs of grains and vegetables and may limit Rajan’s room to cut interest rates.

State Bank of India gained 2.6 percent, while ICICI Bank Ltd., the biggest private lender, increased 3.1 percent. Axis Bank jumped 4.9 percent, taking this year’s gain to 11 percent. Mahindra climbed 2.5 percent to its highest level since April 22. Larsen & Toubro Ltd. rose 1.9 percent.

MSCI Review

Marico Ltd. surged the most since June 2013 after the hair oil maker was added to the MSCI India Index. Bharti Infratel Ltd. climbed 2.7 percent after it was added to the index.

Lupin Ltd., the second-largest drugmaker by value, tumbled 3.4 percent after its fourth-quarter profit missed estimates.

Foreigners sold $204 million of shares on Tuesday, paring this year’s inflow to $6.54 billion, data compiled by Bloomberg show. They were net sellers for 11 days through May 8, the longest streak this year.

The Sensex has dropped 0.9 percent this year and trades at 15.1 times projected 12-month earnings, compared with the MSCI Emerging Markets Index’s multiple of 12.4

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