Indian Stocks Retreat From Two-Year High on Valuation Concern

India’s benchmark stock gauge fell from its highest level in more than two years as concern the rally has exceeded the outlook for earnings growth outweighed inflows from foreign funds.

The S&P BSE Sensex slid 0.3 percent to 20,223.98 at the close in Mumbai, erasing an intraday climb of 0.8 percent. The gauge has risen for five straight weeks, the longest run of gains since October. ICICI Bank Ltd., India’s largest private lender, declined 1.7 percent, leading financials lower. Oil & Natural Gas Corp. slumped 2.4 percent, the most in a week.

The Sensex rebounded 11 percent from a seven-month low on April 9 as foreign investors extended purchases amid easing by central banks from India to Europe. The 30-stock gauge trades at 13.9 times forecast 12-month profits, near the highest level since Oct. 6, compared with a multiple of 10.7 times for the MSCI Emerging Markets Index, data compiled by Bloomberg show.

“Valuations are expensive,” P. Phani Sekhar, a fund manager at Angel Broking Ltd. in Mumbai, said by phone today. “We’ve seen a liquidity-driven rally. We are cautious.”

The Sensex closed on May 17 at its highest level since Jan. 5, 2011. It has risen 4.1 percent this year, the most among benchmark measures in the BRIC group of the largest emerging nations. Foreigners purchased a net $227 million of stocks May 16, taking their investment in local stocks this year to a net $13.4 billion, a record for the period and the largest among 10 Asian markets tracked by Bloomberg, behind Japan, data compiled by Bloomberg show.

ICICI Bank lost the most since May 3 to close at 1,209.80 rupees. The stock, which rallied 5.4 percent last week, was the biggest drag on the Sensex today. ONGC, the nation’s largest explorer, slumped 2.4 percent to 332.70 rupees after climbing 3.7 percent last week. Bharti Airtel Ltd., the nation’s largest mobile-phone operator, sank 2.5 percent to 307.80 rupees, its lowest close since April 25.

Earnings Scorecard

Profit at just two of the 17 Sensex companies that have reported March-quarter earnings so far has trailed estimates, data compiled by Bloomberg show. That compares with about 43 percent that missed forecasts in the three months ended Dec. 31, and 40 percent in the previous two quarters.

The wholesale-price index, a measure of inflation, rose 4.89 percent in April, the least in 41 months, official data showed last week. That prompted Reserve Bank of India Governor Duvvuri Subbarao to say the data will be taken into account at the June 17 policy meeting. The RBI reduced interest rates this month to 7.25 percent from 7.5 percent, joining policy makers in Australia, Europe and South Korea in cutting funding costs to support growth.

India’s record current-account gap, along with elevated consumer prices, has deterred the RBI from reducing rates at a faster pace even as growth in Asia’s third-largest economy slowed to a decade-low of 5 percent in the year ended March, according to an estimate from the government.

The 50-stock CNX Nifty Index on the National Stock Exchange of India Ltd. lost 0.5 percent to 6,156.90, while its May futures traded at 6,173.80.