India’s Sensex Pares Biggest Weekly Loss in 9 Months; HDFC Gains

India’s benchmark stock index pared its biggest weekly decline in nine months on optimism slowing growth will spur the central bank to ease monetary policy, and after the government clarified tax rules for foreign funds.

The S&P BSE Sensex added 0.3 percent to 18,918.52 at the close in Mumbai, narrowing the weekly loss to 2.1 percent, the most since May. The 30-stock gauge plunged 5.2 percent in February, the biggest monthly drop since May. Lenders ICICI Bank Ltd. and Housing Development Finance Corp. climbed at least 1.5 percent each and Maruti Suzuki India Ltd. rallied 5.2 percent.

India’s economy grew 4.5 percent in the three months ended Dec. 31 from a year ago, the weakest pace in almost four years, government data showed yesterday. Finance Minister Palaniappan Chidambaram, in his budget speech the same day, said the fiscal deficit will be cut to 4.8 percent of gross domestic product in the year from April 1, having limited the gap at 5.2 percent in 2012-2013. That’s improved the odds of a cut in interest rates.

“The Reserve Bank of India is probably happy with the fiscal consolidation delivered in the budget and we will see some rate cuts sooner than later,” said John Praveen, chief investment strategist at U.S.-based Prudential Financial Inc., in an interview in Mumbai today. “We will see a cut this month of at least 25 basis points. I won’t be surprised if it’s 50 basis points.” Prudential, which manages $1.06 trillion in assets, operates through Pramerica Mutual Fund in India.

After the first interest-rate reduction in nine months in January, Reserve Bank Governor Duvvuri Subbarao said on Feb. 16 “the room for monetary easing is limited.” The next review is on March 19.

Tax Changes

ICICI Bank rose 1.5 percent to 1,056.35 rupees and Housing Development Finance jumped 2.6 percent to 777.5 rupees. Maruti Suzuki surged 5.2 percent to 1,424.4 rupees. Larsen & Toubro Ltd., the nation’s largest engineering company, advanced 2.4 percent to 1,400.45 rupees.

The government shelved a plan to tighten rules for foreign investors seeking to gain from double taxation treaties after money managers said the proposed rule amendment was too onerous.

A tax residency certificate produced by a foreign investor to claim benefits from treaties with Singapore, Mauritius and Cyprus to avoid double taxation would be accepted as evidence, the finance ministry said today. The certificate is “necessary but not sufficient” to take advantage, according to the budget document tabled in parliament yesterday.

“This removes ambiguity,” Ketan Dalal, joint tax leader at PricewaterhouseCoopers LLP in Mumbai, said in an interview to Bloomberg TV India today. Yesterday he said the proposed changes were “disturbing.”

Net Outflow

Overseas investors sold $237 million of stocks yesterday, the biggest sale in about a year, data compiled by Bloomberg show. Foreigners have still bought $8.24 billion of shares since Jan. 1, extending last year’s $24.5 billion of inflows that were the most among 10 Asian markets tracked by Bloomberg.

“Foreign funds sold as the budget belied expectations of being reformist and concerns regarding the tax uncertainty also spooked some investors,” T.S. Harihar, head of derivatives at ICICI Securities Ltd. in Mumbai, said by telephone. “Today’s clarification has assuaged the tax concerns.”

Foreign funds have been net sellers in two of the past 13 years, based on data compiled by Bloomberg going back to 2000. Inflows climbed to a record $29.3 billion in 2010, making the Sensex the best performer among the world’s 10 biggest markets that year. The largest-ever outflow in 2008 amid the financial crisis triggered the biggest annual slump of 52 percent.

‘Top-Tier Growth’

“In 18 of the past 20 years we have seen net buying by foreigners,” Prashant Jain, chief investment officer at HDFC Asset Management Co., the nation’s biggest money manager with $18.6 billion in assets, said in an interview with Bloomberg TV India today. “Our growth rates are among the top tier. Capital flows will continue in the long term. In the short term, we are vulnerable to disruption in capital flows.”

The Sensex index trades at 13.4 times projected 12-month profits, compared with 10.3 times for the MSCI Emerging Markets Index, data compiled by Bloomberg show. Valuations have fallen from 14.3 times on Jan. 25 when the Indian measure closed at a two-year high. Earnings at 43 percent of the Sensex companies missed estimates in the three months through Dec. 31, compared with 40 percent in the previous two quarters, the data show.

“Historically, our price-to-earnings has never gone under 10-11 levels and the current multiple is closer to fair,” HDFC Asset’s Jain said. “Ultimately interest rates will move down, growth will improve and multiples also will start moving up. The worst in corporate earnings is behind us.”