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Indian stocks dropped the most in three weeks after the ruling alliance’s largest ally withdrew support and the central bank said there’s limited room for further monetary easing. Bonds and the rupee declined.
The S&P BSE Sensex fell 1.5% to 19,008.1 at the close in Mumbai, the sharpest decline since February 28. The rupee weakened 0.4% to 54.3750 per dollar and the yield on 8.15% notes due June 2022 rose 2 basis points to 7.92%. India VIX, the benchmark measure for options prices, rose to the highest level in three weeks.
Prime Minister Manmohan Singh’s government would be 44 seats short of a majority in parliament without the Dravida Munnetra Kazhagam (DMK), leaving it even more reliant on the support of fickle regional parties to pass legislation such as bills to boost foreign investment in pensions and insurance. The Reserve Bank of India cut the repurchase rate to 7.5% from 7.75% and said the scope for further reductions is limited. “It will be difficult for the government to push reforms as smaller parties will play hard ball,” said A K Prabhakar, senior vice-president of equity research at Mumbai-based Anand Rathi Financial Services “Investors are worried the withdrawal will make the government ineffectual.”
The DMK, with 18 lawmakers in the 545-member lower house of parliament, withdrew support over the government’s approach to alleged war crimes in Sri Lanka. The Tamil Nadu state-based party has signaled a patch-up is possible if its demands are met. The government is stable and there is no crisis, Finance Minister Palaniappan Chidambaram said in New Delhi.
State Bank of India, the nation’s biggest lender, slid 2.1% to Rs2,203.55. Oil & Natural Gas Corp, India’s largest explorer, fell 2.5% to Rs309.85. Reliance Industries, owner of the world’s largest refining complex, lost 1.1% to Rs825. Bharat Heavy Electricals, the biggest power-equipment maker, sank 5.1% to Rs185.8, the lowest close since July 2006.
The central bank cut interest rates for the second time this year to bolster the weakest economic growth in a decade. The repurchase rate was pared to 7.5% from 7.75%. Thirty of 35 analysts in a Bloomberg survey predicted the move and the rest forecast no change. A quarter-point rate cut on January 29 was the first since April last year.
Foreign funds have purchased a net $9.8bn of Indian stocks this year, a record for the period, according to data compiled by Bloomberg, amid government efforts to reform the economy by paring subsidies, allowing higher foreign direct investment and speeding up infrastructure projects. Overseas funds bought a net $24.5bn of shares last year, the most among 10 Asian markets tracked by Bloomberg, helping the Sensex to its biggest annual advance in three years.
The stock gauge has declined 2.2% this year, the third worst-performing benchmark index among Asian nations after Malaysia and Hong Kong. The measure is valued at 12.9 times projected 12-month profits, the lowest reading in four months, data compiled by Bloomberg show. The MSCI Emerging Markets Index trades at 10.5 times.
“Political developments could cause knee-jerk reactions but once the dust settles focus will shift back to valuations and the growth attractiveness of the market,” Rajesh Cheruvu, chief investment officer at RBS Private Banking India, said by e-mail today. “Valuation attractiveness would continue to lure portfolio flows and support Indian equities.”
The 50-stock CNX Nifty Index retreated 1.5% to 5,745.95 and its March futures settled at 5,751.90.