Indian Stocks Snap Four-Week Advance on Central Bank Tightening

Indian stocks declined for the first week in five amid concern the central bank’s measures to boost the rupee will hurt economic growth.

State Bank of India, the nation’s biggest lender, tumbled to an 18-month low, leading losses among lenders. Hindustan Unilever Ltd., the Indian unit of the world’s second-biggest consumer-goods company, retreated the most in six months after reporting a slowdown in sales growth. Hindalco Industries Ltd., India’s second-largest aluminum producer, sank the most since November 2009. Carmaker Maruti Suzuki India Ltd. slid to its lowest level since April.

The S&P BSE Sensex decreased 0.3 percent to 19,748.19 at the close in Mumbai, extending this week’s loss to 2 percent. The gauge ended a four-week rally after the Reserve Bank of India tightened banks’ access to cash on July 23 to steady a weakening currency. The moves should not be seen as indicating a forthcoming major shift in monetary policy, Raghuram Rajan, the Finance Ministry’s chief economic adviser, said yesterday. The central bank meets for its next review on July 30.

“Investors are reluctant to take big bets before the central bank’s policy meeting next week,” Gajendra Nagpal, chief executive officer at New Delhi-based Unicon Financial Intermediaries Ltd. said by phone today. “They are looking for more assurances and proof that the tightening measures are short-lived.”

Interest Rates

The central bank raised two interest rates and drained liquidity in the past two weeks, joining nations including Brazil and Indonesia in tightening policy to check currency volatility.

RBI Governor Duvvuri Subbarao maintained interest rates at the last policy meeting in June, citing persistent inflation risks, after cutting the benchmark repurchase rate three times this year to spur an economy that grew at the slowest pace in a decade in the year ended March 31.

India’s rupee headed for a third weekly gain, the longest winning streak since February. The currency has advanced 0.6 percent this week to 58.99 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg.

Bank Sell-Off

State Bank of India decreased 1.8 percent to 1,765.25 rupees, its lowest close since Jan. 12, 2012. HDFC Bank Ltd., the biggest lender by value, lost 1.5 percent to 644.1 rupees. The 13-member S&P BSE Bankex index has fallen 4.7 percent this week, extending last week’s 6.2 percent slide.

The selloff in banking stocks is “justified, because the measures were totally unexpected and very severe,” K. Ramanathan, who oversees $214 million as chief investment officer at ING Investment Management, said in a Bloomberg TV India interview today. “The measures the RBI has undertaken have a significant negative impact on growth.”

Hindustan Unilever tumbled 3.5 percent to 663.7 rupees, the steepest fall since Jan. 23. Sales volume at the company rose 4 percent in the quarter ended June, compared with 9 percent growth in the same period last year, the company said in a statement today.

Net income fell to 10.2 billion rupees ($173 million) in the three months ended June from 13.3 billion rupees a year earlier. Earnings for the same period last year were higher because of a one-time gain from the sale of some properties.

Earnings Forecasts

Four of the 12 Sensex members that have posted earnings so far for the June quarter missed analyst estimates. About 27 percent of companies in the measure missed forecasts for the three months ended March, and 43 percent in the quarter through December, data compiled by Bloomberg show.

Hindalco plunged 7.6 percent to 94.45 rupees. Sterlite Industries (India) Ltd., the biggest copper and zinc producer, sank 5.5 percent to 75.9 rupees. Tata Steel Ltd., the biggest producer of the alloy, fell 1.8 percent to 218.9 rupees.

Maruti retreated 2.7 percent to 1,375.4 rupees. Tata Motors Ltd., India’s biggest truckmaker and owner of Jaguar Land Rover, lost 3.3 percent to 289.95 rupees.

The Sensex has gained 1.7 percent this year and trades at 13.8 times projected 12-month earnings, compared with the MSCI Emerging Markets Index’s 10.1 times.

Global funds sold a net $65.8 million of local shares on July 24, paring this year’s net purchases to $12.3 billion, data compiled by Bloomberg show. They have sold $1.02 billion of Indian stocks this month, the most among 10 Asian markets tracked by Bloomberg, extending June’s $1.8 billion sell-off.

“The RBI knows that if we move from 5 percent-odd growth, which we are having now, to 3-4 percent, that will have a major negative impact on equity flows,” ING Investment’s Ramanathan said. “If you have U.S. growth of 2-3 percent and India growing at 4 percent, why should money come here?”

The CNX Nifty Index on the National Stock Exchange decreased 0.4 percent to 5,886.20. India VIX, which gauges the cost of protection against losses in the Nifty, gained 0.4 percent.