Indian Stocks Drop for Second Day on Monetary Policy Concerns

Indian stocks fell for a second day, paring a weekly gain, after the Prime Minister’s economic adviser said a tight monetary policy should be maintained until the rupee stabilizes and inflation cools.

HDFC Bank Ltd., the country’s biggest lender by market value, dropped to a one-week low. Tata Steel Ltd., the nation’s largest producer of the alloy, fell for a second day. Mortgage lender Housing Development Finance Corp. retreated 0.8 percent, ending its biggest six-day rally since May 2009.

The S&P BSE Sensex decreased 0.3 percent to 19,732.76 at the close, with volume 29 percent less than the 30-day average. Policy easing is dependent on a stable currency, Chakravarthy Rangarajan, head of Manmohan Singh’s economic advisory council, said today. The 6.7 percent rally in the rupee since Raghuram Rajan took charge as central bank governor on Sept. 4 gives the authority a chance to reverse liquidity curbs aimed at shoring up the currency, BNP Paribas SA said in a report yesterday.

“Hopes of monetary easing by the RBI have been tapered,” Gopal Agrawal, chief investment officer at Mirae Asset Global Investments (India) Pvt., said by e-mail. “There was chatter that some liquidity-tightening measures may be diluted.”

Rajan, who reviews borrowing costs for the first time on Sept. 20, is under pressure to boost the currency and avoid a surge in import costs that would fuel inflation. The central bank has cut the repurchase rate thrice this year to revive flagging growth. India and Indonesia still have the highest policy rate among Asia’s biggest economies at 7.25 percent, according to data compiled by Bloomberg.

GDP Forecast

HDFC Bank declined 0.8 percent to 629.2 rupees, the lowest close since Sept. 6. Housing Development fell to 807.95 rupees, after rising 16 percent in six days through yesterday. Tata Steel slid 1.5 percent to 298.3 rupees, taking the two-day loss to 5.5 percent.

India’s gross domestic product may expand 5.3 percent in the year to March 2014 from an earlier estimate of 6.4 percent, Rangarajan said in a twice-yearly report released today. That compares with a 5 percent growth rate last year and an average expansion of 8 percent over the past decade.

The Sensex rose 0.6 percent intraday as data after markets closed yesterday showed factory output climbed 2.6 percent in July from a year earlier. Consumer prices rose 9.52 percent in August, according to another report released yesterday.

“It’s a good number but nowhere does it indicate a strong revival in the weak growth story,” said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai, referring to the jump in factory output.

‘Stability Returning’

The rupee strengthened 0.1 percent to 63.4950 per dollar, completing its best week this year on optimism steps announced by Rajan, including providing concessional swaps for lenders’ foreign-currency deposits, will boost the supply of dollars. The rupee fell a record 68.845 on Aug. 28. Foreigners have bought a net $851 million of local shares since Sept. 1 through yesterday, after three months of net sales, exchange data show.

“The rupee at the current level is well corrected,” Rangarajan said in the report, without specifying a number. “Stability is returning to the foreign-exchange market. As capital flows return and as current-account deficit begins to fall, this tendency will strengthen.”

The Sensex has risen 1.6 percent this year in rupee terms and trades for 13.9 times projected 12-month earnings, compared with the five-year average of 14.1 times. The gauge has lost 12 percent this year in dollar terms. The MSCI Emerging Markets Index trades at 10.5 times, data compiled by Bloomberg show.

Overseas funds bought a net $86 million of domestic shares on Sept. 11, a fifth day of purchases. That boosted this year’s net inflow to $12.3 billion, the second-highest among 10 Asian markets tracked by Bloomberg.

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