Bloomberg

Indian stocks declined the most in a month amid concern the rally that has driven the benchmark index to a record has exceeded the outlook for earnings growth.

Cigarette maker ITC tumbled the most in five months after the health ministry accepted a panel recommendation to ban sale of single sticks and raise the minimum age for use of tobacco products. ICICI Bank dropped after climbing to an all-time high on Monday. Tata Steel, the biggest Indian producer of the alloy, retreated for a fourth time in five days.

The S&P BSE Sensex dropped 0.6% to 28,338.05 at the close. The gauge extended a fifth weekly gain on Monday after China’s unexpected reduction in interest rates spurred a rally in Asian stocks. The Sensex is valued at 15.8 times projected 12-month earnings, versus its three-year average of 13.8. The gauge’s relative strength index rose to 75.3 on Monday, above the 70 threshold seen by some investors as a signal to sell.

“With the Indian market having gone up significantly, there’s a risk it could be getting a bit ahead of itself,” Timothy Moe, chief Asia Pacific strategist at Goldman Sachs Group, said in Hong Kong yesterday. “We think the valuations are a little bit rich, but if we’re right about the fundamental story we think the market could quickly overcome that.”

The Sensex has risen for five straight weeks as foreigners have ploughed $15.5bn into equities this year, the most among eight Asian markets tracked by Bloomberg, and on speculation easing price pressures have given the central bank more room to cut interest rates at its review on December 2. The gauge has risen 34% in 2014, the top performer among the world’s 10 biggest markets.

ITC slumped 5.2%, the worst performer on the Sensex yesterday. Godfrey Phillips India plunged the most since May 2009, while Golden Tobacco Ltd had the biggest decline since June last year. A panel constituted by the health ministry has proposed banning shopkeepers from selling loose cigarettes and raising the minimum age for tobacco sales, Minister Jagat Prakash Nadda said in a written reply to lawmakers. The recommendations need to be approved by the Cabinet, he said.

The winter session of the parliament began on Monday amid speculation Prime Minister Narendra Modi’s government will pass key bills to cut red tape and open the economy to further foreign investment.

ICICI Bank slid 2%, ending a five-day rally that drove its 14-day relative strength index to 77 on Monday. State Bank of India lost 1.4%, falling from its highest level since December 2010.

Tata Steel slid 2.6%. State-run Steel Authority of India plunged 3.5%, the most since August 8. The S&P BSE Mid-Cap and the S&P BSE Small-Cap indexes had the steepest fall since October 16.

Global funds bought a net $80.2mn of local shares on Monday.

Meanwhile, India’s rupee rose on optimism a drop in oil prices will help keep the nation’s current account deficit under control and slow inflation.

Brent crude has dropped 28% since the end of June to $80.15 a barrel, helping slow consumer price inflation to 5.52% in October, the slowest pace since the index was created in January 2012. The current account gap in the year to March is likely to be 1.7% to 2% of gross domestic product, CNBC-TV18 channel reported yesterday citing government officials it didn’t identify. The gap was 1.7% in 2013 and 4.7 percent in the year to March 2013.

“The reports of current account deficit remaining under control are positive for the currency,” said Ankur Jhaveri, co- head of currency and rates in Mumbai at Edelweiss Financial Services. The rupee weakened earlier on the back of dollar demand from oil companies, he said. The currency rose 0.1% to close at 61.8675 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It weakened as much as 0.2% earlier. One-month implied volatility in India’s currency, a measure of expected exchange-rate swings used to price options, fell seven basis points today to 6.17% in Mumbai, according to data compiled by Bloomberg.

Three-month offshore non-deliverable rupee forwards rose 0.1% to 62.67 per dollar.

A view of the Bombay Stock Exchange. The BSE Sensex dropped 0.6% to 28,338.05 at the close yesterday.