Indian Banks to Real Estate Lead Sensex Slump on Rate Increase

Indian equities declined from a three-year high, led by lenders and property developers, after the central bank unexpectedly increased borrowing costs.

Yes Bank Ltd. plunged 7.9 percent. ICICI Bank Ltd., the second-biggest lender, tumbled 4.7 percent. The 13-member S&P BSE Bankex lost 4.2 percent, the biggest decline in two weeks. Real-estate developer DLF Ltd. retreated the most in four years.

The S&P BSE Sensex slid 1.9 percent to 20,263.71 at the close in Mumbai, paring the week’s gain to 2.7 percent. Reserve Bank of India Governor Raghuram Rajan raised the benchmark rate to cool inflation that’s dimmed economic prospects. Rajan acted even after the Federal Reserve’s decision to keep stimulus sent the Sensex to a three-year high yesterday amid the biggest net inflow into local shares in seven months. All 36 analysts in a Bloomberg survey predicted no change in Rajan’s first review.

Rajan “had no option but to defend the rupee and control inflation,” Aneesh Srivastava, who manages 32 billion rupees as chief investment officer at IDBI Federal Life Insurance Co., said by phone. “We will continue with a defensive investment strategy and avoid interest-rate sensitive sectors like banks, autos and real estate.”

Yes Bank sank 7.9 percent to 356.05 rupees, taking this year’s loss to 23 percent. ICICI Bank retreated 4.7 percent to 987.25 rupees. State Bank of India, the biggest lender, fell 3.3 percent to 1,747.55 rupees. HDFC Bank Ltd., the largest lender by value, lost 3.5 percent to 659.05 rupees.

DLF tumbled 12 percent to 151.5 rupees, the most since February 2009. Unitech Ltd. plunged 6 percent to 17.3 rupees. Indiabulls Real Estate Ltd. retreated 7.2 percent to 59.65 rupees. The S&P BSE India Realty Index fell 6.5 percent, the most since February 2012.

Rajan, who took office Sept. 4, raised the repurchase rate by a quarter point to 7.5 percent, the first increase since 2011. Today’s decision suggests Rajan, a former International Monetary Fund chief economist, is determined to build the RBI’s inflation-fighting credentials, with the bump in borrowing costs coming amid the weakest growth since 2009.

The rupee dropped 0.8 percent to 62.2775 per dollar, paring the week’s advance to 1.9 percent. The currency has risen has 5.2 percent in September, ending a four-month losing run. It fell to a record low of 68.8450 on Aug. 28 as overseas funds pulled $3.7 billion from local shares in the three months to August amid prospects of the Fed paring its record stimulus.

International investors bought a net $576 million of local shares yesterday, data released by the regulator showed today. The biggest net inflow since Feb. 7 came amid a rally in Asian stocks, currencies and bonds after the Fed held off from paring monetary stimulus. Foreigners have plowed a net $13.2 billion in Indian equities in 2013, the second-highest among 10 Asian markets tracked by Bloomberg.

“The postponement of tapering is only that, a postponement,” Rajan said in Mumbai today. “We must use this time to create a bullet-proof national balance sheet.”

The Sensex has risen 4.3 percent this year in local rupee terms and trades for 14.1 times projected 12-month earnings, data compiled by Bloomberg show. The gauge has lost 8.7 percent this year in dollar terms. The MSCI Emerging Markets Index trades at 10.8 times, the most expensive since March.

The CNX Nifty on the National Stock Exchange decreased 1.7 percent to 6,012.10. India VIX, which measures the cost of protection against losses in the Nifty, rose 0.9 percent.

Before it's here, it's on the Bloomberg Terminal.