- Ten-year government bond yield at highest level since Sept. 28
- Fed rate-rise bets to keep markets nervous, DBS Bank says
India’s rupee fell the most since August, while stocks and bonds retreated, on concern an election defeat for Prime Minister Narendra Modi’s party in the country’s third-most-populous state will hamper his ability to push through policies to strengthen the economy.
The rupee declined 1 percent to 66.4475 a dollar in Mumbai, prices from local banks compiled by Bloomberg show. The S&P BSE Sensex index dropped 0.6 percent to its lowest close since Sept. 29. The yield on India’s 10-year government bonds rose four basis points to 7.73 percent, the highest since Sept. 28, according to prices from the Reserve Bank of India’s trading system.
The election outcome will embolden Modi’s opponents who have sought to block key economic reforms while portraying his government as intolerant of religious minorities. Sunday’s results in Bihar also show Modi can’t bank on winning control of the upper house of the federal legislature, where lawmakers appointed by India’s 29 states have blocked measures including a national sales tax. Speculation the U.S. will increase interest rates as soon as next month also weighed on India’s financial markets.
“The unfavorable poll results, coupled with renewed U.S. rate-hike expectations, will keep local markets on tenterhooks,” said Radhika Rao, an economist at DBS Bank Ltd. in Singapore. “Worries are that these election results might derail the reform process and tilt the balance away from developmental reforms and encourage a populist agenda.”
Sun Pharmaceutical Industries Ltd., India’s most valuable drugmaker, lost 5.8 percent and was the biggest percentage decliner on the 30-stock Sensex after its second-quarter net income slumped 41 percent. Larsen & Toubro Ltd., the nation’s largest engineering company, dropped to its lowest level since May 2014. ICICI Bank Ltd. and HDFC Bank Ltd., the top two private lenders by assets, slid 1.5 percent.
Odds that the Federal Reserve will increase borrowing costs at its December meeting rose to 68 percent on Friday, up from 56 percent Thursday, after the U.S. reported the biggest monthly surge in payrolls this year. Higher U.S. rates are expected to attract money away from developing markets as the dollar strengthens.
Modi’s opponents, a three-party alliance led by Bihar’s incumbent Chief Minister Nitish Kumar, won 73 percent of seats in the 243-member state legislature, compared with 24 percent for BJP. The defeat followed a loss for the BJP in Delhi elections earlier this year.
“The legislative reforms agenda of the government would take a backseat,” Aneesh Srivastava, who manages $700 million as chief investment officer at IDBI Federal Life Insurance Co., said by phone. “Investors would keenly watch how the government increases the pace of its non-legislative reforms. There’s a lot that can be done with incremental policy.”
Srivastava said he will increase holdings of cyclical stocks including banks, infrastructure companies and automakers, while reducing exposure to software exporters and drugmakers.